The Congressional Budget Office (CBO) warned this week that unless policymakers make significant changes in government policies on taxes and spending (particularly for Social Security and Medicare), the federal budget deficit and debt would grow steadily over the next 30 years, with potentially significant negative effects on the federal budget and the U.S. economy.
According to CBO’s analysis, future spending growth will outpace modest increases in revenue over the next 30 years. Much higher spending on Social Security and Medicare will reflect the aging U.S. population. By 2046, programs for the 65 and over age group will account for almost half of all federal spending, excluding interest payments. CBO states that health care costs will increase due to the aging population and new medical technologies and high personal income.
CBO presents it analysis primarily in terms of the budget deficit and federal debt share of the Gross Domestic Product (GDP).
In the absence of action to reduce the government’s spending and revenue imbalance, federal deficits as a share of GDP will rise significantly, CBO’s study shows. In 2016, the deficit measured as a share of GDP will be about 3 percent (down from its high of almost 9 percent in 2009). For the 2017-2026 period, the deficit’s annual average share of GDP would rise to 3,9 percent. And, unless policy changes on spending and taxes are put in place, CBO estimates that the ratio would increase dramatically to over eight percent in 2037-2046.
At the end of 2007, the federal debt accounted for 35 percent of GDP. Since then, that share as skyrocketed. By the end of 2015, the federal debt reached 74 percent of GDP, the highest since World War II. Between 2017 and 2016, CBO estimates that the average annual debt to GDP share will rise to 86 percent. The average debt to GDP ratio will jump to 110 percent in 2027-2036 (exceeding the previous high of 106 in 1946) and reach 141 percent in 2037-2046.
While higher deficits resulting from this spending/revenue imbalance might boost demand and increase output in the short term, CBO warns that resulting high debt levels over the long term would have negative consequences on the budget and the economy.
Growing deficits and large debt levels would limit the government’s options on how to deal with domestic and foreign policy problems. High deficits and debt levels would restrict the government’s ability to borrow money and constrain spending needed to address exigencies. In addition, higher deficits and long-term debt levels could have significant negative effects on the economy. Lower national savings and income, constrained domestic investment, and increased interest costs could increase the chances of fiscal crises, according to CBO.
