The Congressional Budget Office Analysis of Debt Does the United States have too much debt?
On September 21, 2020, the Congressional Budget Office (CBO) released its Long-Term Budget Outlook for the U.S. It presents the fiscal challenges that will be faced by future administrations. The CBO Budget Outlook includes the following assumptions • The economic impact of COVID-19 is included in the analysis. • Current laws affecting revenues and spending generally remain unchanged. • Individual tax rates revert to their 2017 levels in 2025 due to the 2018 tax bill sunset provisions. • The current corporate tax rate of 21% remains intact as it has no sunset provision. • Spending for Medicare and Social Security continues as scheduled even after their trust funds are exhausted. The following are key results taken directly from the CBO analysis: • “ Deficits . Even after the effects of the 2020 coronavirus pandemic fade, deficits in coming decades are projected to be large by historical standards. In CBO’s projections, deficits increase from 5 percent of gross domestic product (GDP) in 2030 to 13 percent by 2050—larger in every year than the average deficit of 3 percent of GDP over the past 50 years.” • “ Debt . The projected budget deficits would boost federal debt to 195 percent of GDP by 2050. • High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.” • “ Spending . After the effects of increased spending associated with the pandemic dissipate, spending as a percentage of GDP rises in CBO’s projections. With growing debt and higher interest rates, net spending for interest nearly quadruples in relation to the size of the economy over the long term, accounting for most of the growth in total deficits. Also increasing are spending for Social Security (mainly owing to the aging of the population) and for Medicare and the other major health care programs (because of rising health care costs per person and, to a lesser degree, the aging of the population).” Summarizing the debt and deficit analysis by the CBO – both increase significantly. Federal debt explodes to 195% of GDP by 2050 if current government revenue and spending streams do not change. The U.S. is already well on the way to reaching that figure. A federal debt to GDP level of 195% could put the U.S. economy in an extremely precarious position, with increasing borrowing costs, potential inflation, increased interest rates, and even the possibility of a significant financial crisis. The debt challenges create policy challenges. Social Security programs are already under financial strain. The policy challenge is to balance tax revenues, the mix of those revenues (corporate and individual) and government spending on programs with an acceptable level of debt. Those are difficult challenges to meet prudently without political divisiveness, but with divisiveness those challenges may not be met.
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Center for Business and Economic Insight
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