NEW YORK – With federal debt reaching levels of GDP not seen since the end of World War II, and the retirement of the Baby Boomers escalating, the long-term budget outlook is “daunting,” the Congressional Budget Office said Wednesday.
With the average budget deficit equaling 37% of GDP in the past four decades, the CBO expects by year-end “federal debt will reach roughly 70% of GDP, the highest percentage since shortly after World War II.” CBO blames lower tax revenues and higher federal spending for the increase, but notes, “the growing debt also reflects an imbalance between spending and revenues that predated the recession.”
CBO expects deficits to fall as the economy recovers, “But the budget outlook, for both the coming decade and beyond, is daunting. The retirement of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for many years (although the magnitude of that gap is very uncertain).”
It warns, “Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades under any plausible assumptions about future trends in the economy, demographics, and health care costs.”
Health care costs would grow to 9% of GDP in 2035, if unchecked, from its current 6%, while Social Security will grow to 6% of GDP by 2030 from less than 5% now.
Large deficits and growing debt would slash national savings, push up interest rates, spur further borrowing from abroad and dampen domestic investment. All of this would lower income growth in the U.S., the CBO said.
To control deficits and debt, CBO said, policymakers must "increase revenues substantially as a percentage of GDP, decrease spending from projected levels or adopt some combination of those two approaches."
