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Yesterday the Congressional Budget Office reported on the long-term outlook for the federal budget. This report comes just a few days after the Obama administration released a report showing that the federal budget deficit is declining. Countering that spin, CBO shows that, while short-term deficits have decreased, they grow out of control in the long-term due in part to the president’s unwillingness to deal with Washington’s long-term budget problems.

According to CBO, the immediate term will seem calm. A stronger economy and spending constraints in current law (imposed on the president by Republicans in Congress) will cause deficits to stay between 2.5 and three percent of GDP until 2018. But after that, public debt grows continuously through 2089.

World War II Debt Levels Without the World War

Under CBO’s baseline scenario, in just 25 years, public debt will match the highest point ever seen in our nation’s history – 106 percent of GDP in 1946. Public debt will be 225 percent of GDP in 2089. Using an alternative fiscal scenario, in which certain current policies that expire in the future are assumed to be extended, this WWII level would be exceeded in 2030. By 2039, it would be more than 180 percent of GDP. In comparison, Greece’s current debt-to-GDP ratio is 175 percent while Italy’s is nearly 133 percent. One well known economic study found that nations with debt-to-GDP ratios over 90 percent experienced approximately one percent slower annual economic growth.

 Public Debt to Reach WWII Levels

Even these debt levels may be optimistic, since CBO assumes that revenues grow steadily as a share of GDP, reaching 19.4 percent by 2039. This level of revenue has only been met once since the end of World War II – in 2000.

Debt Becomes Unsustainable

Beyond the immediate 25-year window, federal debt will begin to grow faster than GDP, which CBO calls an “unsustainable” situation. Just like a family that’s spending faster than it’s earning, the debt spirals out of control. CBO has confirmed that this will happen to the U.S. unless Congress enacts reforms.

2039 Spending Levels

Total spending. In 25 years, spending will equal 26 percent of GDP, an increase from the 20.4 percent expected for 2014 and the 20.5 percent average over the past 40 years.

Discretionary spending. Spending on discretionary government functions will equal 6.8 percent of GDP, a decrease from 9.3 percent in 2014, and the 11.2 percent average of the past 40 years. In particular, defense spending will decrease from 3.4 percent of GDP in 2014 to 2.7 percent of GDP in 2024.

 Basic Functions of Government Get Squeezed

Discretionary spending only 20% of the budget in 2039

Interest spending. Interest on the national debt is a consequence not of current or future priorities, but past recklessness. By failing to cut spending more, we add more debt, which increases interest costs and interest rates, which increases spending, which increases our debt. This vicious cycle will cause interest costs as a percentage of GDP to increase more than 3.5 times through 2039, consuming 18 percent of all federal spending in that year.

Social Security. Social Security is in financial trouble. CBO estimates that the combined trust funds will be exhausted in 2030. For the purposes of spending and debt calculations, CBO assumes that Social Security pays full benefits even after this date. If that happens, Social Security spending would rise from 4.9 percent of GDP in 2014 to 6.3 percent of GDP in 2039, an increase of 47 percent.

Health care spending. Medicaid, SCHIP, and Obamacare subsidies are expected to grow by nearly 80 percent – going from 1.9 percent of GDP in 2014 to 3.4 percent of GDP in 2039. Medicare will increase from three percent of GDP in 2014 to 4.6 percent of GDP in 2039 – a 53 percent increase.

Economic Growth

CBO predicts that massive federal borrowing will crowd out private investment, leading to less capital available to the private sector, and thus lower output and lower income. This “economic feedback” would cause GNP per person to be $2,000 lower in 2039 than without economic feedback – $76,000 per person versus $78,000. Under the alternative fiscal scenario, GNP per person would be $5,000 less, at $73,000.

Alternately, deficit reduction would lead to long-term economic growth. CBO looked at two scenarios to reduce deficits in the next 10 years. In one of them, deficits are lowered by $2 trillion in the next decade, and GNP per person would be $78,000 in 2039. Under the second, deficit reduction would be $4 trillion and GNP would be $80,000 per person.

It’s Not Too Late

Congress still has time to reform Washington’s spending. The amount of deficit reduction required would not be easy, but it is better than a debt-driven economic crisis forcing us to finally take action. Under one option, Congress could lower deficits by $2 trillion over the next decade below the baseline level and keep that level of deficit reduction in later decades. GDP would be higher due to the increased private economic activity and the public debt in 2039 would be 75 percent of GDP instead of 106 percent (in the baseline scenario) or more than 180 percent (in the alternative scenario). Under a second option, Congress could lower deficits even further, by $4 trillion in the next decade and keeping that level of reduction in later decades. This would cause public debt to be 42 percent of GDP in 2039, much closer to the previous 40-year average of 39 percent.