WASHINGTON - In its annual report on the U.S.'s long-term fiscal outlook, the Congressional Budget Office said Tuesday the combination of an aging American population and rising health care costs will put the nation on a ruinous fiscal path unless reforms are implemented.
The CBO report repeats themes that it has articulated for years, but there are hints of urgency that have not been as evident in earlier CBO reports.
The CBO notes that the U.S.'s public debt has jumped from 40% of GDP in 2008 to more than 70% of GDP by the end of this year.
"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 says.
"However, the growing debt also reflects an imbalance between spending and revenues that predated the recession," it adds.
The CBO report says that if current policies are maintained, spending on major federal health care programs alone would grow from more than 5% of GDP today to almost 10% in 2037 and then continue to jump.
The CBO outlines two future fiscal scenarios: one which assumes that current laws remain intact such as the expiration of the Bush era tax cuts and across-the board-spending cuts; and a second that assumes that some adjustments are made that more closely reflect the fiscal policy that has been approved in recent years.
In the first scenario, which would lead to sharply higher revenues and lower spending than the historic norm, public debt would fall to about 53% of GDP by 2037.
In the second scenario, which would result in much lower revenues and higher spending than the first scenario, public debt would approach 200% of GDP by 2037.
"The explosive path of federal debt under the alternative scenario underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course," the CBO says.
The CBO report says clearly that U.S. fiscal policy must change.
"The aging of the U.S. population and the rising costs for health care mean that the combination of budget policies that worked in the past cannot be maintained in the future," CBO says.
"To keep deficits and debt from climbing to unsustainable levels, as they will if the current set of policies is continued, policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches," it adds.
Doug Elmendorf, the director of the CBO, will testify on the report Wednesday before the House Budget Committee.
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.