More Federal Debt: How 2040’s Debt Problem is Already Looking Grim
The Congressional Budget Office (CBO), the U.S. Congress’s nonpartisan research think-tank, released its 2015 Long-term Budget Outlook this month, and the findings aren’t good. According to the CBO’s projections, which assume that current laws and tax structures remain similar to their current models, federal debt held by the public would grow to be more than 100% of the U.S.’s Gross Domestic Product (GDP) in the next 25 years.
Measuring the federal debt as a percentage of the U.S.’s GDP is a way to compare debt levels across time and without the influence of inflation. With federal debt held by the public currently exceeding $13 trillion, it is difficult to fathom its size on simply a monetary basis. Further, basing the debt on a scale of GDP indicates if the federal debt is growing faster than the U.S. economy. As the graph below indicates, since 2000, federal debt has grown from levels just above 30% in the early 2000s into a whopping 74% of GDP in 2015. That is not good for the stability of the U.S. economy.
Even worse, the CBO expects federal debt as a percentage of GDP to keep growing indefinitely. That’s because projections suggest that the government will continue its consistent trend of spending more money than it brings in with revenue, leading to continued budget deficits.
These budget deficits are projected to be smaller for the next five years, but the CBO finds that spending will increase significantly in the coming decades. An aging population, coupled with higher health care costs, more health insurance exchange subsidies, and increases in the number of Medicaid participants are all projected to cause the federal government to face increasing federal deficits as a percentage of the economy’s total GDP.
The impacts of growing debt levels present a variety of economy-wide problems. First, federal debt held by the public must be financed from investors, who would otherwise be putting their money toward private investment. As a result, high government debt means less capital available for firms, which would in turn lower the amount of output and income possible.
Additionally, the government has increasing interest payments as it incurs more debt. Depending on revenue levels, it may have to cut back on goods and services provided, raise taxes, or borrow even more money just to pay interest.
The CBO also notes in its report that high debt levels restrict the government’s ability for stimulus packages in times of recession. And, more debt means a greater risk of default, particularly if a recession were to hit the U.S. economy and decrease tax revenues.
To reduce debt to 38% – its 50 year average – of GDP by 2040, the U.S. would have to increase revenues by 14% or decrease spending by 13% each year (or, perhaps, undertake a combination of both). That is both difficult and unrealistic given current government spending problems.
Still, resolving the U.S.’s federal debt problems require policy changes, and soon. Each additional year of budget deficits means more debt and a bigger bank to climb out of.
While it isn’t fun or exciting or even very interesting to focus on alleviating the U.S.’s debt problems, it is crucial for maintaining the U.S.’s economy in the next few years to 2040 and beyond.