Government forecasters are warning the U.S. budget deficit will more than double as a share of economic output by 2040 if current tax and spending laws remain unchanged.
On Tuesday June 16, the Congressional Budget Office (CBO) released the 2015 Long-Term Budget Outlook. (Source: The Congressional Budget Office, June 16, 2015.)
According to the report, the federal budget’s long-term outlook has been getting worse over the past few years since the Great Recession. During the downturn, economic activity slowed down. In response, the federal government implemented policies that increased spending while decreasing revenue. From 2008 to 2012, federal budget deficit totaled a whopping $5.6 trillion.
One consequence of the large federal budget deficit is an increase in the amount of debt held by the public, the report said; public debt almost doubled from 2008 to 2012. Right now, the amount is around 74% of the U.S. gross domestic product (GDP).
The budget office expects that in holding current regulations as unchanged, publicly held federal debt would decline slightly relative to the GDP in the next few years. After that, however, rising health care spending and the aging of the population would push back budget deficits to their current high level and above.
Looking at the long term, the deficit would grow from less than three percent of GDP this year to more than six percent in 2040. At that point, federal debt would be equal to 107% of the U.S. GDP.
The CBO expects that such a high debt level would raise concerns from creditors. Eventually, they will begin to doubt the government’s ability to repay the debt and borrowing costs would subsequently rise. Such a large debt burden would also put pressure on the federal government’s revenue, which would probably translate to higher tax rates. Higher taxes would lower economic output. Therefore, the federal government would face higher interest rates and lower revenues, which does not help with the high debt level.
Congressional forecasters also warned high debt levels could discourage private investment. When people’s savings are going to government securities, there will not be enough left for private investment. That leaves limited growth in U.S. capital stock, and output will be further limited as a result.