Growing Deficits Over The Long Term Would Cause Federal Debt To Exceed 100 Percent Of GDP By 2039

from the Congressional Budget Office

Last week CBO released its latest report on the long-term budget outlook. (For a quick overview of the report, take a look at The 2014 Long-Term Budget Outlook in 26 Slides.) Previous blog posts have highlighted the projected imbalance in federal spending and revenues over the next 25 years. Today’s post explains how projected shortfalls would accumulate over time if current laws remained generally unchanged, causing federal debt to grow faster than the economy, and discusses the consequences of such large and growing federal debt. A blog post tomorrow will discuss the magnitude of policy changes that would be needed to meet various possible goals for federal debt.

 

What Are CBO’s Projections of Federal Debt Over the Long Term?

Debt held by the public represents the amount that the federal government has borrowed in financial markets (by issuing Treasury securities) to pay for its operations and activities. If a given combination of federal spending and revenues is to be sustainable over time, debt held by the public eventually must grow no faster than the economy does. If debt continued to rise relative to gross domestic product (GDP), at some point investors would begin to doubt the government’s willingness or ability to repay its obligations. Such doubts would make it more expensive for the government to borrow money, thus necessitating cuts in spending, increases in taxes, or some combination of those two approaches. For that reason, the amount of federal debt held by the public relative to the nation’s annual economic output is an important barometer of the government’s financial position.

At the end of 2008, federal debt held by the public stood at 39 percent of GDP, which was close to its average of the preceding several decades. Since then, large deficits have caused debt held by the public to grow sharply—to a projected 74 percent of GDP by the end of fiscal year 2014. Debt has exceeded 70 percent of GDP during only one other period in U.S. history: from 1944 through 1950, when it spiked because of a surge in federal spending during World War II to a peak of 106 percent of GDP (see the figure below).