CBO: Federal debt to exceed 70 percent of economic output
Tuesday, June 05, 2012
CBO: Federal debt to exceed 70 percent of economic
output
By: Kevin G. Hall, McClatchy Newspapers
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."