by Matt Rosenberg August 23rd, 2010
OVERVIEW: With spending continuing to far outpace income, U.S. government debt owed to the public – as a proportion of total domestic economic output (Gross Domestic Product or GDP) – is now higher than ever except for in the years following World War II.
This “public debt” of the U.S. government, which is held by individual and institutional investors in the financial markets, was reported by the Congressional Budget Office in late July to be about $8 trillion, or about 54 percent of seasonally-adjusted, projected year-end 2010 U.S. GDP. CBO projects federal public debt will rise to 62 percent of GDP by this year’s end, and to between 80 and 180 percent of GDP by 2035 – under one or another of two broad economic scenarios – unless corrective action is taken, starting immediately. In the following recent report, CBO delivers a stiff prescription for fiscal reform.
KEY LINK: “Federal Debt And The Risk Of A Fiscal Crisis,” An Economic And Budget Issue Brief, Congressional Budget Office, 7/27/10.
- Deficit spending to stimulate a faltering economy can be sound policy in the short-term but can carry negative long-term effects. “Unless offsetting actions are taken at some point to pay off the additional government debt accumulated while the economy was weak, people’s future incomes will be lower than they otherwise would have been.” Continued escalation of national debt also restricts the ability of the government to provide economic stimuli when needed in the future.
- An aging population and rising health care costs will drive federal spending as a share of GDP much higher than in recent decades. Unless Congress better controls spending growth or robustly increases revenues as a share of GDP, or does some combination of both, “growing budget deficits will cause debt to rise to unsupportable levels.”
- The consequences of this could be sweeping and deeply harmful. More of private savings would go to buying government debt and less to investment in “productive capital goods such as factories and computers,” lowering economic output and incomes. If marginal tax rates were raised to meet higher national debt, work and savings would be discouraged and output would be further reduced. Rising interest costs could also force cuts in spending on federal programs.
- “A rising level of government debt…combined with an unfavorable long-term budget outlook..would increase the probability of a fiscal crisis for the United States…there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis.”
- CBO projections are that U.S. federal debt held by the public will be 62 percent of U.S. GDP at the end of fiscal year 2010, up sharply from 36 percent at the end of 2007. “In only one other period in U.S. history – during and shortly after World War II – has that figure exceeded 50 percent.”
- CBO projects two different long-term budget scenarios, either of which strongly suggests the need for greater federal fiscal discipline.
- The “extended baseline scenario” follows from current law and includes CBO budget projections through 2020 with adjustments for new health care legislation, but after a period of relative defecit and debt stability, results in national debt rising to 80 percent of GDP by 2035 because of required increases in spending on health care and social security. This would necessitate “an immediate, permanent cut in spending or increase in revenues equal to about 1 percent of GDP,” or $145.9 billion – which is also equal to 4 percent of the 2010 federal budget.
- The “alternative fiscal scenario” involves various expected changes to current law to limit tax growth and increase medicare payments to physicians, with the net result of national debt growing to 90 percent of GDP by 2020, 110 percent by 2025 and 180 percent by 2035, which would “pose a clear threat of a fiscal crisis during the next two decades.” This would require “an immediate permanent cut in spending or increase in revenues equal to about 5 percent of GDP,” or $729.85 billion – which is also equal to 20 percent of the 2010 federal budget.
- “The later that actions are taken to address persistent budget imbalances, the more severe they will have to be…Larger and more abrupt changes in fiscal policy, such as substantial cuts in government benefit programs, would be more difficult for people to adjust to than smaller and more gradual changes.”
According to data from the U.S. Bureau of Economic Analysis, U.S. GDP was $14.2 trillion in 2009 and is projected to be almost $14.6 trillion for 2010.
According to a May, 2010 CBO report, the economic stimulus package approved by Congress boosted GDP 1 to 2 percent in 2009, and will boost GDP 1.5 to 4.2 percent in 2010, .7 to 2.2 percent in 2011 and .1 to .3 percent in 2012.
TheÂ 2010 U.S. Budget (summary table on p. 114) shows planned outlays of $3.55 trillion in 2010, and projects nearly $7 trillion in deficit spending from 2010 through 2019.