The Congressional Budget Office (CBO) projects that under current law the U.S. Federal Debt will double as a share of the economy over the next 30 years, rising from 100 percent of GDP in 2021 to 200 percent in 2051. The Concord Coalition
Elected leaders have long known that the federal budget is on an unsustainable trajectory, yet elected leaders of both parties have “delayed, dodged or simply ignored the warnings”, writes Robert L. Bixby, executive director of The Concord Coalition. In fact, elected leaders have recklessly piled on new fiscal spending and cut federal taxes.
In fiscal year 2020, the reported federal budget deficit increased for the fifth consecutive year. Driven largely by the federal government’s response to the COVID-19 pandemic, the federal budget deficit for fiscal year 2020 reached $3.1 trillion—triple the level in fiscal year 2019. This represents the largest budget deficit as a share of GDP since 1945.
The unsustainable fiscal path strains the federal budget and contributes to growing debt.
- Federal Deficit – The federal deficit is the amount by which the government’s spending exceeds its revenues for a given period, usually a fiscal year.
- Federal (National) Debt – Federal debt is the amount of money that the federal government owes, either to its investors (debt held by the public) or to itself (intragovernmental debt).
According to CBO, high and rising federal debt increases the likelihood of a fiscal crisis and could lead to a large drop in the value of the dollar or to a loss of confidence in the government’s ability or commitment to repay its debt in full.
Consequences of rising debt. Rising debt could also cause policymakers to feel restrained in their capacity to support the economy during a downturn or unexpected events, such as global military conflicts, natural disasters, or public health emergencies. After the current pandemic recedes and the economy substantially recovers, policymakers should turn their attention to swiftly developing a strategy to change the long-term fiscal path. The sooner actions are taken, the less drastic the changes will need to be.
Effects of compounding interest. Persistently low interest rates have resulted in lower spending on net interest. However, due to the substantial size of the debt, GAO projects net interest will become the largest category of spending by 2050, growing from 1.6 percent of GDP in 2020 to 8.9 percent of GDP by 2050. The costs of debt vary based on interest rates, and increased rates can have a compounding effect on the debt. Spending on net interest was $345 billion in fiscal year 2020 and is projected to exceed $1 trillion in fiscal year 2033.
As a result, the U.S. has arrived at a critical point with the National Debt nearing its highest level as a share of the economy since World War II and climbing steadily upward.
The nonpartisan Congressional Budget Office (CBO) projects that under current law the debt will double as a share of the economy over the next 30 years, rising from 100 percent of GDP in 2021 to 200 percent in 2051.
The main drivers of the escalating U.S. National Debt are the nation’s aging population and rising health care costs, which translate into ever-rising spending for popular benefit programs such as Social Security and Medicare. Revenues are projected to rise as well, but not by enough to keep pace with spending.
Health care. Total health care spending (public and private) in the United States continues to grow faster than the economy and is driven both by an increase in the proportion of the population enrolled in Medicare and by the increase in health care spending per beneficiary. GAO projects federal spending on major health care programs to grow from 5.9 percent of GDP in fiscal year 2020 to 8.0 percent of GDP in fiscal year 2050.
Social Security. Demographic factors, such as longer lifespans, an aging population, and slower labor force growth, are straining Social Security programs and contributing to a gap between program costs and revenues. GAO projects spending on Social Security will grow from 5.2 percent of GDP in fiscal year 2020 to 6.1 percent of GDP in fiscal year 2050.
As the trustees of those two programs warned in their respective 2021 report, Social Security and Medicare both face long-term cash shortfalls under currently scheduled benefits and financing. Both programs will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging. Medicare also sees its share of GDP grow through the late 2070s due to projected increases in the volume and intensity of services provided.
Trustees’ warnings over several decades have been consistent, and yet inaction has turned what was once seen as a long-term problem into a much more immediate concern. The trustees project that the combined Social Security trust funds will be exhausted by 2034 and the Medicare Hospital Insurance trust fund will be exhausted by 2026, leaving little time to phase in changes that would prevent sudden benefit cuts, tax increases, or higher deficits.
Whether it’s the Social Security and Medicare trust funds or the overall federal budget, delay does not just burdened future generations, it actually increases that cost. According to a 2020 estimate by the Congressional Budget Office, the annual amount of deficit reduction needed to keep the debt at 100 percent of GDP in 2050 would rise from 2.9 percent of GDP to 4.8 percent if actions were delayed by 10 years.
America’s growing fiscal deficit and federal debt
Historically, spikes in debt are often correlated with major events such as wars and economic disruptions, such as a pandemic. Deficits went up during the crisis and came down when the crisis passed. We are witness to that dynamic now after the pandemic-induced recession.
Deficit reduction is a natural phenomenon of an economic recovery after a recession or economic downturn. However, deficit reduction would change the preexisting and long-standing imbalance between revenues and spending. Increasingly, episodic crises will simply add to a trajectory of debt that is already on an unsustainable path.
One thing is certain. New unexpected future challenges that will require extraordinary measures will arise that will occur and surprise future presidents. And some future challenges should not be surprises at all, such as a new pandemic or a climate crisis.
“We have not put ourselves in a stronger fiscal or economic position to deal with today’s unanticipated events by allowing old problems to fester, nor will we be in a stronger position in the future if we continue forward with our heads in the sand,” states Bixby.
America’s net debt currently stands at approximately 124% of nominal GDP (historically high and unprecedented). The debt level continues to get worse, but at an accelerated pace over the ensuing decades. We have time to fix it, but this problem will not age well, and the sooner we start to fix it, the better. If we don’t fix the growing federal deficit and ballooning federal debt, it will morph itself into a fiscal and debt beast we won’t like.
References:
- https://thehill-com.cdn.ampproject.org/c/s/thehill.com/opinion/finance/596740-bidens-had-many-surprises-this-term-the-budget-crisis-isnt-one-of-them
- https://www.gao.gov/assets/gao-21-275sp.pdf
- https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287
The Concord Coalition is a nationwide, non-partisan, grassroots organization advocating generationally responsible fiscal policy. The Coalition is dedicated to educating the public about the causes and consequences of large-and-growing federal budget deficits and national debt, the long-term challenges facing the economy and how to build a sound fiscal future for all generations.