Chart of the Day: Long-term budget picture isn’t pretty

You mad, bro?

During a September interview with David Letterman, President Barack Obama addressed the national debt, telling The Late Show host that Americans shouldn’t worry about it in the short-term. Obama did explain, however, that there were issues that faced the country. He noted that the national debt “is a problem long-term and even medium-term and so we’re going to have to take care of this debt and deficit, but we’ve got to do it in a balanced way.”

Actually, the budget deficits that have been run up on Obama’s watch in the last four years have been a problem. If you’ll recall the debt ceiling fight we had last year and the warnings from credit rating agencies that the United States had to do something about its fiscal obligations — in fact, we’ve downgraded by two credit rating agencies. That spurred Congress to work with Obama on sequestration cuts that are supposed to take place at the beginning of the year. Oddly enough, those cuts are now part of the “fiscal cliff,” a combination of tax hikes and spending cuts that every politician in Washington is trying to avoid at this present moment.

Even though he underestimated the short-term problems with the deficit, which isn’t something that raising taxes with help because it doesn’t promote growth, Obama is right about the long-term issues that pose a very real threat to the economy.

The federal government current spends around 24% of gross domestic product (GDP). Entitlements alone are around 10% of GDP. But according to the CBO’s alternative baseline scenario, entitlements will account for 16.6% of GDP by 2037. That’s just entitlements. Discretionary spending, including defense, is another 9.6% of GDP. Interest on the national debt adds in another 9.5%.

By 2037, the government will spend 35.7% of GDP and the national debt will be nearly 200% larger than the economy. The United States cannot sustain growth while government spending essentially crowds out the private economy. Raising taxes will also harm economic growth.

Veronique de Rugy, a senior research fellow at the Mercatus Center, puts this all into a chart for us that should be an eye-opener (she doesn’t include interest on the debt):

The welfare states of Europe have proved what happens when a government spends on entitlement programs without concern of the consequences. We’re quickly headed down that road, and there will be a point, assuming Washington doesn’t do anything, that no one is going to lend to us.

 


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