The amount of federal debt held by the public is projected later this year to surpass 70 percent of the nation’s annual economic output, the nonpartisan Congressional Budget Office said Tuesday in a report that spotlighted the stark choices policymakers face on taxation and government spending.
Coming out of the so-called Great Recession, the United States has recorded the largest budget deficits – in dollar terms and as a percent of the economy – since World War II, the CBO said. Federal debt held by the public in 2008 stood at about 40 percent of the gross domestic product, the sum of all goods and services sold in the U.S. economy in a year. It’s approaching twice that today, projected at 73 percent or higher, and the CBO suggested that both parties are to blame.
“The sharp rise in debt stems partly from lower tax revenues and higher federal spending caused by the severe economic downturn and from policies enacted during the past few years,” the CBO said in its 2012 Long-Term Budget Outlook. “However, the growing debt also reflects an imbalance between spending and revenues that predated the recession.”
The projections are a reminder about the difficult choices that must be made to set the nation on a sounder fiscal footing for the future. Later this year, Congress must decide whether to extend tax cuts that are set to expire and whether to let steep, automatic spending reductions take effect.
“The numbers are a little different than they were before, but it’s the same story,” said Roberton Williams, a former CBO economist who’s a senior researcher at the Tax Policy Center, jointly run by the centrist Urban Institute and the center-left Brookings Institution. “The most important message is, putting it simply, you can’t have your cake and eat it too. You can’t have low taxes and high spending.”
As grim as the report was, the calculation, some economists think, understates the true scope of our debt problem. Debt held by the public, which stood Tuesday at $10.9 trillion, excludes money borrowed from Social Security and other government accounts. When this $4.7 trillion, called intra-governmental holdings, is added into the mix, the total debt is in the ballpark of $15.7 trillion.
That’s about equal to the nation’s entire annual output. That’s important because new academic research suggests that nations with debt levels of 90 percent or more of their GDP grow more slowly – at rates similar to the sluggish U.S. recovery – and take longer to recover from financial crises.
Greece, the nation that’s at the heart of European debt woes, had a ratio of government debt to GDP in excess of 142 percent before its crisis and is now above 160 percent. Italy’s ratio was around 119 percent last year, before the debt crisis snowballed.
The United States prints the dollar, the world’s reserve currency, and as an economy it’s much larger, more robust and more entrepreneurial than most countries with which it’s compared. Still, that doesn’t preclude the potential for severe future problems if the debt trajectory isn’t fixed and investors lose confidence.
The White House suggested that the report is a call to action.
“This is arithmetic, not calculus," spokesman Jay Carney said. "We know what we have to do. There has been a great deal of ink spilled on the various options available to us.”
The CBO report spelled out policy options for Congress to address the problem. One scenario has Congress allowing Bush-era tax cuts to expire and the creeping alternative-minimum tax to hit more taxpayers rather than get an annual patch. This option is possible later this year if lawmakers and President Barack Obama remain locked in stalemate. Under this scenario, the CBO projects that debt held by the public would fall to 61 percent of the GDP in 2022 and 53 percent by 2037.
The watchdog group Committee for a Responsible Federal Budget said in a statement that such savings were unrealistic “since it assumes policymakers will deviate substantially from past practices.”
Additionally, under the do-nothing scenario tax revenue would rise to 24 percent of GDP in 2037, the end of the CBO’s 25-year outlook. That’s about 10 percentage points higher than it is today and is very high by historical standards.
The other scenario the CBO projected is just as bleak. It assumed that all the tax cuts set to expire this year are extended for the next decade, and by 2022 the federal debt held by the public would grow from its projected 73 percent of the GDP this year to 90 percent. It would pass its historical peak of 109 percent by 2026, the CBO said, and approach 200 percent by 2037.
“In fact, the projections discussed above understate the severity of the long-term budget problem . . . because they do not incorporate the negative effects that additional federal debt would have on the economy,” the CBO report said. “In particular, large budget deficits and growing debt would reduce national saving, leading to higher interest rates, more borrowing from abroad and less domestic investment, which in turn would lower the growth of incomes in the United States.”