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CBO Director Issues Warning on National Debt

Monday July 13th, 2015   •   Posted by Craig Eyermann at 6:26am PDT   •  

Congressional Budget Office Director Keith Hall, who has been on the job since February 27, 2015, testified about the state of the U.S. national debt on July 9, 2015. CNSNews’ Terence Jeffrey reports on Hall’s testimony before the U.S. Senate’s Homeland Security and Governmental Affairs Committee, in which he described how the CBO projects the portion of the nation’s total public debt outstanding that is held by the public will grow:

In 2015, the CBO estimates that the U.S. government debt will be 74 percent of GDP. That is higher than the 69-percent-of-GDP debt the U.S. government had in 1943—the second year after Pearl Harbor.

By 2039, CBO projects, the debt will increase to 101 percent of GDP and by 2040 to 103 percent GDP.

At that point, Hall told the Senate Homeland Security and Governmental Affairs Committee, the “debt would still be on an upward path relative to the size of the economy.”

The chart below shows the CBO’s projections:


One key point we should address is that the U.S. government’s total public debt outstanding is already at 103% of the nation’s GDP. Much of the growth of the publicly held portion of the U.S. national debt will come as the intragovernmental holdings portion of the nation’s liabilities, which consists mainly of money the U.S. government “borrowed” from the surplus tax collections that have funded Social Security’s Old Age and Survivors Insurance Trust Fund since 1982, will be steadily transformed into regular debt held by the public as the Trust Fund is steadily depleted to support the retirement of the Baby Boom generation.

In 2014, Social Security’s actuaries projected that the Old Age and Survivors Insurance Trust Fund would most likely be depleted sometime in 2033, roughly 18 years from now. At that time, under current law, benefits to all Social Security recipients would be cut by 23%, as the funds available to pay benefits would be provided only by Social Security’s tax collections.

Social Security’s Trustees will likely issue their 2015 annual report by the end of July 2015. This will update their estimate of of when Social Security’s trust fund will be depleted and the amount by which benefits will be cut.

Hall’s written testimony lays out why the national debt will reach record levels by that time, and why this will cause both the nation’s fiscal health and economic prospects to worsen (emphasis ours):

Mainly because of the aging of the population and rising health care costs, the extended baseline projections show revenues that fall well short of spending over the long term, producing a substantial imbalance. As a result, budget deficits are projected to rise steadily and, by 2040, to raise federal debt held by the public to a percentage of GDP seen at only one previous time in U.S. history — the final year of World War II and the following year.

The harmful effects that such large debt would have on the economy would worsen the budget outlook. The projected increase in debt relative to the size of the economy, combined with a gradual increase in effective marginal tax rates (that is, the rates that would apply to an additional dollar of income), would make economic output lower and interest rates higher than CBO projected when producing the extended baseline before considering those macroeconomic effects. Those effects would, in turn, feed back into the budget, leading to lower federal revenues and higher interest payments on the debt. (The harm that growing debt would cause to the economy was not factored into CBO’s detailed long-term budgetary projections; those effects were projected separately. Therefore, they are generally not reflected in the discussion of the extended baseline elsewhere in this testimony, but they are addressed in Chapter 6 of The 2015 Long-Term Budget Outlook.)

Chapter 6 of the CBO’s 2015 Long-Term Budget Outlook is available in this PDF document.

Hall, in his written testimony, described what the U.S. Congress would have to do to reduce the portion of the national debt held by the public to its long-term historic average of 38% of GDP by the year 2040:

  • At one end of the spectrum, lawmakers could choose to reduce deficits solely by increasing revenues. Such a policy would require boosting revenues by 14 percent in each year over the 2016–2040 period relative to the amounts that CBO projects in the extended baseline. For households in the middle fifth of the income distribution in 2016, a 14 percent increase in all types of revenues would raise federal tax payments for that year by about $1,700, on average.
  • At the other end of the spectrum, lawmakers could choose to reduce deficits solely by cutting noninterest spending, in which case they would have to make such spending 13 percent lower than projected in the extended baseline in each of the next 25 years. For example, a 13 percent cut would lower initial Social Security benefits by an average of about $2,400 for people in the middle fifth of the lifetime earnings distribution who were born in the 1950s and who claimed benefits at age 65.

Doing some back-of-the-envelope math with budget figures projected for 2016’s revenue and spending levels, a 14% increase in revenue or a 13% decrease in spending works out to be roughly a $500 billion adjustment, regardless of which option might be chosen.

However, of the two options, a half-trillion-dollar cut in government spending would be much less harmful to the nation’s economy than would a tax hike of the same amount. Doing the math for a projected GDP of $1,819 billion in 2016, in the absence of offsetting factors, $500 billion in spending cuts would reduce the nation’s GDP by just $250 billion (or 1.3%), while $500 million in tax hikes would significantly impair the nation’s economy, lowering the nation’s GDP by $1,500 billion (or 8%).

With offsetting factors, such as quantitative easing by the Federal Reserve, the negative impacts of spending cuts or tax increases could be minimized and even eliminated, but it would take much less effort from the Fed to offset the small negative effect of spending cuts upon GDP than would be needed to offset the negative effect of tax hikes.

And the longer it takes to make an adjustment that will keep the national debt from fully developing into a lead anchor with the potential to sink both the economy and the nation, the worse all the numbers and percentages will get.

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July 2015