The Congressional Budget Office in its 2017 Long-Term Budget Outlook issued a dire warning to D.C. policymakers about the likely consequences of continued inaction on the budget deficit.
Thanks largely to the growing costs for programs like Medicare and Social Security, the federal debt will reach 150 percent of gross domestic product by 2047, the CBO projected, up from an expected 77 percent at the end of this year. CBO projections assume that federal policy stays the same and calculates outcomes based on the expected changes in other factors like health-care costs, interest rates, productivity growth and labor force participation.
That 150 percent expected debt level is based on the most likely value for each of those variables. For example, as the Fed raises interest rates from historic lows, the existing debt will be more expensive to finance. Health-care costs are expected to continue to grow faster than inflation. If economic circumstances are worse than expected, public debt could balloon even faster.
Failing to address the debt issue could weaken U.S. international leadership by making the country more dependent on outside creditors, according to the report. It could also increase the chances of a fiscal crisis and reduce the country’s ability to address a crisis if one occurs, as well as reducing saving and income and raising the costs of borrowing.
“Large and growing federal debt over the coming decades would hurt the economy and constrain future budget policy,” the office wrote in the report.
Demographic shifts account for much of the future risk of an unsustainable federal debt. Overall, population growth is slowing, and the population is getting older. The CBO uses fertility, immigration and mortality estimates to project the future makeup of the country. Today, about 15 percent of the population is 65 or older, but by 2047 that figure is expected reach 22 percent.
The aging population will both shrink the workforce participation rate and put strain on mandatory Social Security and Medicare spending. Already, those and other major health-care programs account for 54 percent of federal spending (excluding interest), but by 2047 they would reach 67 percent. Individual income taxes are also expected to rise, but not enough to make up for the deficit caused by those programs.
The number of women joining the workforce has stabilized, and the aging population means that the labor force will grow much more slowly than in the past. Productivity — including both labor and capital services — is also expected to grow at a more sluggish pace, based on recent trends.
Interest rates are also expected to rise, though not as fast as they would have were labor force growth and inflation rates as high as they have been in the past. Together, those factors point to maximum annual GDP growth of 1.9 percent over the next 30 years. Without major policy changes, the CBO doesn’t see a return to growth of around 3 percent a year, as the country experienced over the past half-century.
Imagine that legislators were interested in avoiding the gloomy future described by the CBO’s projections. The report lays out exactly the size of revenue increases or noninterest spending cuts that would have to be implemented to keep the debt at today’s levels, or to bring it back down to its 50-year average.
For example, if lawmakers wanted to get back down to the debt average of 40 percent of GDP, they would have to raise revenue or cut spending (or a combination of the two) by a little more than 3 percent of GDP annually (that’s $620 billion, or $1,900 a person), according to the report. The CBO by design makes few specific recommendations, but it notes that if Congress sought to reach that goal by raising revenue across the board, it would increase taxes for middle-income households by $2,100 a year. It could also cut Social Security benefits by about $2,800 a year for the same income bracket.
The CBO points out that the degree of change necessary depends a lot on how long the government puts off making changes. The accumulation of debt feeds back on itself as net interest payments rise. That means the longer lawmakers wait, the more they will have to invest in program cuts or tax hikes to solve the problem. By 2044, net interest payments alone will be larger than discretionary spending for the first time since the 1960s.
The unusually sparse “skinny budget” released by the Trump administration earlier this month cut discretionary spending by 1.2 percent overall, which is a bigger reduction than his two most recent predecessors proposed in their first budgets. The plan does not address the administration’s intentions for Social Security and other mandatory spending, which are expected along with the administration’s tax plan at a later date.