Latest CBO report reaffirms nation's spending problem
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Last Thursday, the Congressional Budget Office (CBO) revised its Budget and Economic Outlook for 2017-2027. In its latest revision of the January report, the CBO revised up the deficit figures over the 10-year period from 5 percent of GDP by 2027 to 5.2 percent due to a continued explosion in spending on mandatory programs.

The CBO summarized its findings by stating: “The projected rise in deficits would be the result of rapid growth in spending for federal retirement and health care programs targeted to older people and to rising interest payments on the government’s debt, accompanied by only moderate growth in revenue collections.”

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This conclusion shouldn’t come as a surprise to anyone. In my previous post on deficit spending I explained how the federal government does not have a revenue problem, but a spending problem. The problem remains the same.

 

Deficits are now the norm

Under presidencies both red and blue, the federal government has been running up the red ink for almost two decades. The last time a federal budget surplus was recorded was in 2001.

With current levels of mandatory spending and promises of future spending increases, these CBO projections convey one very simple message: Deficits are now the norm and the level of federal debt held by the public will continue to mount as the interest on that debt eats ever-larger amounts of the federal budget.

On current trends, the level of debt held by the public is set to be about $15 trillion by the end of 2017, and continue to rise to $25 trillion by 2027. Most of this growth in spending is in mandatory spending, which is on track to reach almost 80 percent of total federal spending over the next decade.

With policymakers only having discretion over 20 percent of the federal budget by 2027 (80 percent being on autopilot), one might begin to ask, “What is the point in policymaking at all?” But, this looming problem is so much more than the end of fiscal democracy.

Mounting debt will leave us all significantly worse-off

With the total gross debt set to surpass $20 trillion in the coming months, federal debt held by the public will equate to around 78 percent of GDP by the year's end. These figures present some serious problems for the future economic condition of the United States. Several empirical studies consistently demonstrate that developed economies that reach debt levels of 90 percent of GDP and above fail to achieve robust levels of economic growth.

In a 2010 working paper, Harvard economists Carmen Reinhart and Kenneth Rogoff found that, “For 1900–2009, median and average GDP growth hovers around 4–4.5 percent for levels of debt below 90 percent of GDP, but median growth falls markedly to 2.9 percent for high debt (above 90 percent); the decline is even greater for the average growth rate, which falls to 1 percent.”

When looking at current debt and growth figures for the 35 OECD countries in 2016, a similar pattern is found. The trend line shows that there is a clear relationship between higher levels of debt and lower growth rates, particularly for levels of debt above 90-100 percent of GDP. In this study, no country with publicly-held debt above 100 percent experienced growth of more than 1.4 percent.

Debt to GDP ratio

After running a very simple regression analysis on the data from these 35 developed countries, a moderate, negative correlation was found between these two variables. With the recent CBO report projecting average growth of 1.9 percent in the coming decade, it is very plausible to predict that this figure will be revised down once the debt levels reach the 90-100-percent range.

Debt and Growth

Calamitous economic results

The economic impacts of an ever-increasing national debt will be crippling for future generations, with federal debt held by the public to surpass 90 percent of GDP in the coming decade. As federal borrowing reduces national savings over time, the nation’s capital stock will ultimately be smaller, meaning that both productivity and income will be lower than would be the case if the debt was smaller.

Furthermore, with a large and growing debt burden, the likelihood of a financial crisis in the United States is greatly increased as investors become unwilling to finance the government’s borrowing. Policymakers must recognize this problem for what it ultimately is: a spending problem. Until this problem is properly addressed, we can expect years of economic stagnation ahead.

Jack Salmon is a Washington, D.C.-based researcher focused on federal fiscal policy. Salmon holds an M.A. in political economy with specializations in macroeconomics and comparative economic analysis from King's College London. 


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