By Erik Wasson - 06/05/12 04:19 PM EDT
U.S. debt is on track to be nearly twice the size of the U.S. economy by 2037, the nonpartisan Congressional Budget Office (CBO) warned Tuesday.
The new CBO report states that increased entitlement spending driven by the retirement of the baby boomers and insufficient revenue is making the long-term outlook for the national debt increasingly dire.
Many economists have warned that if debt held by the public approaches 100 percent of GDP, it can bring on the kind of fiscal crisis being felt in European countries today, in which governments must suddenly slash spending and laying off workers in the face of rising interest rates caused by spooked investors.
CBO’s latest prediction is similar to its 2011 report despite the $2.1 trillion in budget cuts enacted in last August’s debt-ceiling deal between the White House and Congress.
CBO said last year that debt as a share of GDP would reach 109 percent of the economy by 2023 — rather than 2026 — and would approach 190 percent in 2035.
In its new report, CBO says that if current policies continue, including allowing the Bush-era tax rates to increase in January and going forward with large cuts in payments to doctors under Medicare, the debt path would be less explosive. In that scenario, debt held by the public moves from 73 percent of GDP this year to 61 percent by 2022 and 53 percent by 2037.
This prediction is slightly rosier than last year, when CBO predicted federal debt held by the public would grow from about 70 percent in 2011 to 84 percent by 2035 under the current-law scenario. The problem is that Congress is unlikely to allow scheduled spending cuts and tax increases, including an expansion of the Alternative Minimum Tax, to take effect.
“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,” the CBO report urges.
CBO notes that the debt stood at 40 percent of GDP at the end of 2008 before Obama took office, and will rise to 70 percent this year.
Tuesday’s report will likely provide additional campaign fodder for GOP presidential candidate Mitt Romney and Republicans, who are emphasizing the need to tackle the long-term debt as a way to create business certainty and boost jobs.
“Today’s CBO report confirms that President Obama has placed us on a path to fiscal ruin," Romney for President policy director Lanhee Chen said in a statement.
"On the heels of last week’s dismal jobs report, today’s CBO report on the deteriorating fiscal situation underscores the obvious: The president’s policies are not working," House Budget Committee Chairman Paul Ryan (R-Wis.) said in a statement. "Repeating Europe’s mistakes, the president’s policies call for job-crushing tax increases and harsh disruptions for beneficiaries of government programs as the debt spirals out of control. … CBO’s report is the latest in a series of warnings for policymakers to advance principled solutions that responsibly confront our generation’s most pressing challenges."
Already, super-PACs supporting Romney have been running television advertisements that blame President Obama for the exploding debt.
The White House has responded that Romney’s fiscal plans would hurt the poor while protecting tax breaks for the wealthy, and it urged Congress to adopt a combination of spending cuts and tax increases.
Democrats used the CBO report to call for a “balanced” debt plan that includes spending cuts and tax increases.
"CBO’s report is a warning that we must get our fiscal house in order by achieving big and balanced deficit reduction that includes both spending and revenues," House Minority Whip Steny Hoyer (D-Md.) said. “However, Republican leaders’ insistence on finding savings only from cuts to essential services for the most vulnerable Americans will not get us any closer to the real, comprehensive deficit reduction solution we need."
CBO’s report focuses on Medicare and Social Security spending as major drivers of the debt increase.
Spending on healthcare entitlements in the report rises from 5 percent of GDP today to nearly 10 percent in 2037. Together, major healthcare entitlement spending and Social Security grows from more than 10 percent of GDP to almost 16 percent in the next 25 years.
Obama last fall proposed modest cuts to Medicare to try to stabilize its finances, but the White House has not put forth a specific Social Security plan.
The House-passed budget, authored by Ryan, seeks to tackle Medicare by partially privatizing it.
Future seniors would be given the option of receiving subsidies to buy private insurance rather than remain in the traditional fee-for-service program.
Democrats say that this approach will actually increase costs and, because the subsidies would be capped, would result in many seniors paying more for their healthcare. They are preparing again to paint the GOP as ending Medicare “as we know it” in the fall campaign.
The Ryan budget was also essentially mum on fixes to Social Security. Bipartisan panels such as the Bowles-Simpson commission have proposed lower cost-of-living increases and an increased retirement age to shore up the program.
— This story was posted at 9:52 a.m. and last updated at 1:39 p.m.