CBO: ‘The Projected Amounts of Debt Would…Make a Fiscal Crisis More Likely’

By Terence P. Jeffrey | July 15, 2016 | 4:17pm EDT
President Obama delivers State of the Union Address on Jan. 12, 2016. (AP Photo/Susan Walsh)

(CNSNews.com) - In its Long-Term Budget Outlook published this week, the Congressional Budget Office said that the additional debt it projects the federal government will accumulate in the coming years if it continues on its current path would make a fiscal crisis in the United States more likely.

“In particular,” the CBO said in its report, “the projected amounts of debt would: Reduce national saving and income in the long term; increase the government’s interest costs, putting more pressure on the rest of the budget; limit lawmakers’ ability to respond to unforeseen events; and make a fiscal crisis more likely.”

“Federal debt held by the public ballooned in the past decade,” the report noted.

The CBO projects that the federal debt held by the public is on its way to unprecedented levels as a percentage of Gross Domestic Product:

“If current laws governing taxes and spending did not change, the United States would face steadily increasing federal budget deficits and debt over the next 30 years, according to projections by the Congressional Budget Office. Federal debt held by the public, which was equal to 39 percent of gross domestic product (GDP) at the end of fiscal year 2008, has already risen to 75 percent of GDP in the wake of a financial crisis and a recession. In CBO’s projections, that debt rises to 86 percent of GDP in 2026 and to 141 percent in 2046—exceeding the historical peak of 106 percent that occurred just after World War II. The prospect of such large debt poses substantial risks for the nation and presents policymakers with significant challenges.”

(This chart is from "The 2016 Long-Term Budget Outlook" published by the Congressional Budget Office.)

The first chapter of the outlook—“The Long-Term Fiscal Imbalance”—includes a subsection titled “Greater Chance of a Fiscal Crisis,” which explains how such a crisis could unfold:

“A large and continuously growing federal debt would make a fiscal crisis in the United States more likely. Specifically, investors might become less willing to finance the government’s borrowing unless they were compensated with high interest rates. As a result, interest rates on federal debt would abruptly become higher than the rates of return on other assets, dramatically increasing the cost of future government borrowing. In addition, that increase would reduce the market value of outstanding government bonds. If that happened, investors would lose money. The potential losses for mutual funds, pension funds, insurance companies, banks, and other holders of government debt might be large enough to cause some financial institutions to fail, creating a fiscal crisis. A fiscal crisis also can make private-sector borrowing more expensive because uncertainty about the government’s responses can reduce confidence in the viability of private-sector enterprises.

“Unfortunately, no one can confidently predict whether or when such a fiscal crisis might occur in the United States. In particular, the debt-to-GDP ratio has no identifiable tipping point to indicate that a crisis is likely or imminent. All else being equal, however, the larger a government’s debt, the greater the risk of a fiscal crisis.

“The likelihood of such a crisis also depends on economic conditions. If investors expect continued economic growth, they are generally less concerned about the government’s debt burden; conversely, substantial debt can reinforce more generalized concern about an economy. Thus, fiscal crises around the world often have begun during recessions—and, in turn, have exacerbated them.

“If a fiscal crisis occurred in the United States, policymakers would have only limited—and unattractive—options for responding. The government would need to undertake some combination of three approaches: restructure the debt (that is, seek to modify the contractual terms of existing obligations), use monetary policy to raise inflation above expectations, and adopt large and abrupt spending cuts and tax increases.”

The CBO points to specific factors it sees driving up future federal spending:

“In CBO’s projections, deficits rise during the next three decades because the government’s spending grows more quickly than its revenues do. … In particular, spending grows for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt.

“Much of the spending growth for Social Security and the major health care programs results from the aging of the population: As members of the baby-boom generation age and as life expectancy continues to increase, the percentage of the population age 65 or older is anticipated to grow sharply, boosting the number of beneficiaries of those programs. By 2046, projected spending for those programs for people 65 or older accounts for about half of all federal noninterest spending….

“The federal government’s net interest costs are projected to rise sharply as a percentage of GDP for two main reasons. The first and most important is that interest rates are expected to be higher in the future than they are now, making any given level of debt more costly to finance. The second reason is the projected increase in deficits: The larger they are, the more the government will need to borrow.”

The CBO also projects that the U.S. economy will grow more slowly, on average, in the next thirty years than it has in the past half century:

“CBO anticipates that if current laws generally did not change, real GDP—that is, GDP with the effects of inflation excluded—would increase by 2.1 percent per year, on average, over the next 30 years. Over the past 50 years, by contrast, the annual increase in real GDP has averaged 2.9 percent. Projected GDP growth is slower than that largely because of retiring baby boomers, falling birthrates, and declining participation in the labor force. Projected growth is also held down by the effects of fiscal policy under current law—above all, by the reduction in private investment that is projected to result from rising federal debt.”

In 2015, according to the Bureau of Economic Analysis, the United States saw a record tenth straight year without 3.0 percent or better annual growth in real GDP.

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