CBO projects dire debt level

The nonpartisan Congressional Budget Office (CBO) warned Tuesday that the long-term outlook for the national debt remains dire, despite a near-term drop in the deficit that has been lauded by the Obama administration.

Federal debt held by the public is slated to rise from 73 percent of the economy in 2013 to 100 percent of gross domestic product by 2038, the CBO said.

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Many economists have warned that if debt held by the public approaches 100 percent of the GDP, it can bring on the kind of fiscal crises seen recently in European countries.

The long-term increase occurs mostly in the out years. The budget deficit this year is expected to be $642 billion, a drop from the $1.1 trillion deficit in 2012. The decline will continue through 2015, the CBO said.

After that, growing costs related to Medicare and Social Security will add greatly to deficits. The CBO said that the 100 percent GDP estimate by 2038 is likely an underestimate since the CBO is not taking into account the effects on the economy of that much debt.

“The unsustainable nature of the federal government’s current tax and spending policies presents lawmakers and the public with difficult choices,” the CBO says in its new report. “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past.”

Major entitlement programs will cost 14 percent of the economy by 2038 compared to a historic average of 7 percent, largely due to the aging of the population and exponential growth in healthcare costs. 

“The bottom line remains the same as last year: the federal budget is on a course that cannot be sustained indefinitely,” CBO Director Doug Elmendorf said.

The CBO’s report shows that the discretionary budget, which includes everything from cancer research to the National Park Police, is a shrinking part of the nation’s fiscal problems.

Elmendorf emphasized that entitlements and increasing interest payments, not agency budgets, are what is driving the debt higher. By 2038, spending on everything other than entitlements and interest would be 7 percent of the GDP, below the 11 percent post-World War II average.

The projections come as the White House and Congress pivot to a fight over the 2014 discretionary budget and the need to raise the debt ceiling by mid-October. 

Speaker John Boehner (R-Ohio) wants to tie entitlement cuts to the debt ceiling, while President Obama has said that such negotiations should involve new tax revenue. Obama has also vowed to not negotiate on raising the debt ceiling.

House Budget Committee Chairman Paul Ryan (R-Wis.), who has proposed partially privatizing Medicare to cut costs, said the CBO report highlight's Obama's lack of responsibility.

“CBO has posed an important question: Are we going to get control of the debt before it reaches a breaking point? The president and congressional Democrats want to wish the problem away. But that’s simply irresponsible," Ryan said.

“In the weeks ahead, I hope we work together to heed CBO’s warning. We must provide relief to the families we serve. We should start by delaying ObamaCare and paying down the debt to help grow the economy."

Elmendorf told reporters that repealing all of ObamaCare, including its taxes, would increase budget deficits. 

Budget Committee ranking member Chris Van Hollen (D-Md.) said the report should encourage Congress to replace indiscriminate cuts to agency budgets known as the sequester.

"We should build on the more than $2.5 trillion we’ve achieved in deficit reduction since 2010 with a mix of targeted spending cuts and cuts to tax breaks for millionaires and special interests — not the deep, immediate, indiscriminate cuts in the sequester, which the CBO says will cost up to 1.6 million fewer jobs by this time next year," Van Hollen said.

“Unfortunately, House GOP proposals will turn back the clock on that progress and damage our economic recovery," Van Hollen said.

The government is expected to take in more tax revenue because of income inflation, according to the CBO. Revenue will equal 19.5 percent of the GDP by 2038 compared to 15 percent last year.

The outlook for the debt is worse this year largely because Congress did not allow all of the Bush-era tax rates to expire and indexed the Alternative Minimum Tax. Last year, the CBO found that under current law, debt held by the public would be 53 percent of the GDP by 2037.

The CBO says that Congress and the administration have a herculean task ahead of them if they want the debt in 2038 to equal the 39 percent level seen before President Obama took office.

To reach that goal, a combination of higher taxes and spending cuts must be found.

But sudden austerity could backfire, the CBO warned.

“On the one hand, waiting to cut federal spending or raise taxes would increase the size of the policy adjustments needed to put the budget on a sustainable course,” the CBO said. “On the other hand, implementing spending cuts or tax increases quickly would weaken the economy’s current expansion and give people little time to plan for and adjust to the policy changes.” 

Elmendorf said that to get the debt down to the historical average, a $4 trillion deficit cutting deal compared to current law and scored over 10 years would be needed. To keep the debt at today’s level, a $2 trillion deal is needed, he said.

“Those are pretty large numbers,” Elmendorf said.

— This story was last updated at 11:51 a.m. and 5:01 p.m.