CBO outlook on long-term debt worsens

New figures released Wednesday by the Congressional Budget Office (CBO) show debt rising to 190 percent of the gross domestic product by 2035. 

The annual long-term budget outlook forecasts a surge in public debt this year that will rise to 70 percent of GDP by the end of fiscal 2011, compared to 62 percent by the end of 2010. 

The figures are much worse than those released by the CBO a year ago.

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The CBO offers two forecasts, both of which show the nation's finances deteriorating over the next quarter-century. 

In one scenario that is considered more likely, the Bush tax rates are continued, as are rising Medicare payments to doctors. Under that scenario, federal debt reaches 109 percent of GDP by 2023 and would approach 190 percent in 2035. 

In the other scenario, in which the Bush tax rates expire and Medicare payments are slashed, total federal debt held by the public still would grow from an estimated 69 percent of GDP this year to 84 percent by 2035.

The dismal numbers come as Vice President Biden leads negotiators in the House and Senate trying to work out a deal that would raise the nation's $14.3 trillion debt ceiling while cutting deficits. Lawmakers face an Aug. 2 deadline to reach a deal. 

Republicans have resisted including any tax increases as part of a deal, while Democrats have resisted significant changes to entitlement benefits.

In its outlook last year, CBO estimated debt would grow to 80 percent of GDP by 2035. In the alternative scenario, debt reached 109 percent of GDP by 2025 and would have reached 185 percent in 2035.

According to the CBO report, the less likely scenario is worse in part because of higher discretionary and non-healthcare spending in the short term, and lower tax reveues due to the December tax cut deal between Congress and the White House. That deal extended the Bush era rates.

In the more likely "alternative" scenario, primary spending is actually lower but CBO has changed its assumptions on taxes and now assumes more temporary tax provisions are extended through the coming decade.

Leading economists have warned that when debt exceeds 90 percent of GDP, a country is entering the danger zone for a debt crisis where creditors start to panic.

The CBO report will likely add fuel to GOP demands for entitlement reform. CBO Director Doug Elmendorf will testify on the numbers Thursday at the House Budget Committee.

CBO projects that without reforms, federal spending on healthcare entitlements like Medicare and Medicaid will grow from less than 6 percent of GDP today to about 9 percent in 2035 under the extended baseline. Under the alternative it rises to 10 percent by 2035.

Its estimate for the growth of Social Security is less dire, with it rising from less than 5 percent of GDP today to about 6 percent in 2030.

Elmendorf in a blog post said noted that the CBO is understating the severity of the fiscal picture since it does not account for the compounded effects high debt will have in slowing the economy.

He said that budget deficits are likely to shrink in the coming years due to economic growth, but the aging baby-boomer population and rising healthcare costs make the situation after that “daunting.” 

 “To keep deficits and debt from climbing to unsustainable levels, policymakers will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches,” he said. 

He warned that making such changes in the short term could harm the economy and said that making medium- and long-term reforms sooner rather than later is preferable.

Senate Budget Committee Chairman Kent Conrad (D-N.D.) said Wednesday that the report highlights the need for an an ambitious deficit-reduction package. He said he is worried by reports that the Biden deficit talks will only look for $2 trillion in deficit reduction rather than the more than $4 trillion over 10 years achieved by the president's fiscal commission.  

“While I am encouraged by the bipartisan nature of the leadership negotiations being led by Vice President Biden, I am concerned by reports the group may be focusing on a limited package that will not fundamentally change the fiscal trajectory of the nation. That would be a mistake," Conrad said. 

“This is no time for half-measures. What is needed is a bipartisan and comprehensive package that is similar in size and scope to the $4 trillion deficit-reduction plan produced by the President’s Fiscal Commission. Importantly, the Fiscal Commission plan took a balanced approach, with discretionary spending cuts, including defense; entitlement changes; and tax reform that raises revenue. Both Democrats and Republicans had to move off of their fixed positions and make concessions in order to reach an agreement. That is what is needed to truly put the country back on a sound fiscal course,” he said.


This post was updated at 10:33 a.m.