Discussion: (2 comments)
Comments are closed.
A public policy blog from AEI
View related content: Economics
Today’s long-term budget forecast from the Congressional Budget Office is a great counter to the sudden enthusiasm for more government spending to boost the economy. Among the most interesting—and scary—factoids:
1. Despite Obamacare, spending on major federal healthcare programs would grow from more than 5% of GDP today to almost 10% in 2037. The curve was not bent.
2. The aging of the population and the rising cost of healthcare would cause spending on Medicare, Medicaid, and Social Security to grow from more than 10% of GDP today to almost 16% of GDP 25 years from now, equivalent to about $850 billion today. (By comparison, CBO says, spending on all of the federal government’s programs and activities, excluding net outlays for interest, has averaged about 18.5 percent of GDP over the past 40 years.)
3. Under the CBO’s alternative fiscal scenario—the one which is politically more likely and assumes current tax and spending policies are extended—federal debt would be 93% of GDP in 2022 vs. 73% today. After that, “the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels.” Debt as a share of GDP would exceed its historical peak of 109% by 2026, and it would approach 200% in 2037.
4. But the above forecasts actually understate the severity of the long-term budget problem “because they do not incorporate the negative effects that additional federal debt would have on the economy. In particular, large budget deficits and growing debt would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower the growth of incomes in the United States.”
Accounting for that stuff, debt as a share of GDP could hit 250% in 2035—and then the CBO models break down: “Debt would reach 250% of GDP by 2035 under the assumptions leading to these estimates. CBO’s model cannot reliably estimate output after debt reaches that amount, in the agency’s judgment.”
5. And under the “250% debt as a share of GDP” scenario, the U.S. standard of living—as measured by per capita GDP—would start steadily declining in the early 2020s and keep declining until 2035 when—to repeat—the CBO model breaks.
6. Other bad effects of the high debt scenario: a) higher interest payments on that debt, which would eventually require higher taxes, a reduction in government benefits and services, or some combination of the two; b) restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises: c) increase the probability of a sudden fiscal crisis, during which the government would lose its ability to borrow at affordable rates.
7. The CBO’s alarming bottom line: “The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course.”
Comments are closed.
1150 17th Street, N.W. Washington, D.C. 20036
© 2016 American Enterprise Institute for Public Policy Research