Increasing federal debt will be a growing burden on government action, crowding out lawmakers’ ability to adopt tax and spending priorities in good times and reducing flexibility during recessions, all while making a fiscal crisis more likely and hindering long-term growth, the nonpartisan Congressional Budget Office said Wednesday.
In the annual Long-Term Budget Outlook, the legislature’s budget scorekeepers said that the ratio of debt to GDP this year will be 69 percent, 7 percentage points higher than last year. In 2021, the CBO predicts debt will reach 76 percent of GDP, but under a more dire—and more likely—scenario, the public debt will be 101 percent of GDP 10 years from now, well into the economic danger zone of 90 percent or more.
Last year, that worst-case scenario predicted a debt-to-GDP ratio of 87 percent in 2020, demonstrating that the public debt picture has worsened considerably, in part due to a bipartisan tax deal last year that reduced expected revenue.
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While much of the debt is driven by the recession’s drop in tax revenues and government actions taken in response to the economic calamity, CBO highlighted the structural deficit that existed before 2007 and cites growing health care costs and the aging population as a major driver of government spending; federal health spending is set to grow from less than 6 percent of GDP today to more than 9 percent in 2035.
The CBO says that allowing the 2010 tax deal that extended Bush administration tax policies to expire as planned would be helpful in keeping government sustainable, noting “that significant increase in revenues and decrease in the relative magnitude of other spending would offset much—though not all—of the rise in spending on health care programs and Social Security.”
However, the CBO's more likely scenario assumes that the tax deal is extended, that the alternative minimum tax would continue to be restricted, and that the “doc fix,” Congress’s annual decision to ease limits on Medicare physician pay, will occur as expected. Under this scenario, debt would rise to 187 percent of the economy in 2035.
While CBO does not provide policy recommendations, it urged policymakers to take significant action to reduce the deficit and debt by reducing spending, increasing taxes, or some combination of the two. While those changes will slow economic recovery, the agency warns, the sooner they are made, the more gradual they can be, easing the transition into new policies but likely requiring sacrifices from older Americans.
“CBO’s new long-term budget outlook again highlights the urgency of reaching agreement on a bipartisan and comprehensive long-term deficit and debt reduction plan,” Senate Budget Chairman Kent Conrad, D-N.D., said in a statement. “We must address the projected explosion in federal debt. If we fail to act, it will have devastating consequences for our economy and for the future well-being of the American people.”
On Thursday, CBO Director Doug Elmendorf will testify at a House Budget Committee hearing on the long-term outlook.