CBO: In 25 Years, Federal Debt Held by the Public Will Exceed 100% of GDP

July 16, 2014 - 3:56 PM

 

Congressional Budget Office
(CNSNews.com)-- Despite a sharp projected rise in personal income taxes over the next 25 years, federal debt held by the public will exceed 100 percent of the nation’s Gross Domestic Product (GDP), reaching 106 percent of GDP by 2039 if current laws remain unchanged, the Congressional Budget Office (CBO) reported July 15.

In addition, “federal debt held by the public is projected to grow faster than the economy starting a few years from now, and because debt is already unusually high relative to GDP, further increases could be especially harmful,” the CBO warned.

“Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing its debt to soar,” the CBO’s “2014 Long-Term Budget Outlook” noted.

“The total amount of federal debt held by the public is now equivalent to about 74 percent of the economy’s annual output,” which is a “higher percentage than at any point in U.S. history, except a brief period around World War II,” the study said.

Debt Held by The Public

In contrast, the national debt “stood at 39 percent of GDP at the end of 2008,” the CBO noted.

This massive debt will continue to increase over the next two decades due to an “aging population, rising healthcare costs and an expansion of federal subsidies for health insurance,” the CBO stated.

The cost of Social Security, Medicare, Medicaid and subsidies through the Affordable Care Act will rise to 14 percent of GDP, or double what it’s been in the past, the non-partisan government agency reported, adding that this is a “trend that could not be sustained indefinitely.”

Though federal debt held by the public is slated to remain around the current 74 percent of GDP between 2015 and 2020, it will reach 78 percent by 2024 and total around $7.6 trillion. Government revenues will also increase relative to GDP,  but spending will greatly outpace it, the CBO warned.

During that same time period, individual income taxes are projected to increase from 8 percent to 10.5 percent of GDP while interest rates rise from their currently low levels, putting more stress on Americans struggling to make ends meet.

Components of Total Revenue

The report lists some of the negative consequences of carrying such a large debt, which it says “will impede the ability of the federal government to respond to a future economic crisis.” High debt could also hurt the U.S.’ credibility with investors who may doubt the country’s ability to pay it off, leading to even higher interest rates if the government needs to take out  new loans.

The CBO warns that there are no quick fixes, and that immediate spending cuts or tax increases will weaken economic expansion in the coming years. But in order to put the federal budget on a sustainable course, the CBO recommends "reducing spending for large benefit programs below the projected levels, letting revenues rise more than they would under the current law, or adopting some combination of those approaches."

Fixing the problem years from now “would represent a greater drag on output and income in the long term and would increase the size of the policy changes needed to reach any chosen target for debt,” the report noted.