CBO: Long-term debt problems increase risk of a fiscal crisis

While President Barack Obama continues to twiddle his thumbs, a new report from Congressional Budget Office (CBO) shows that the nation’s fiscal outlook for the next 10 years remains bleak.

While the report, which was issued yesterday, estimates that the deficit for the current fiscal year will come in under $1 trillion for the first time since 2008, unsustainable spending will have deficits soaring once again by the end of the 10-year window:

The federal budget deficit will fall to $845 billion in 2013 before rising again over the next decade as an aging population and soaring healthcare costs lead to an explosion in entitlement spending, the Congressional Budget Office reported Tuesday.

The budget deficit would fall below $1 trillion under President Obama for the first time in 2013 and would drop to $430 billion by 2015, according to CBO’s annual fiscal outlook.

But CBO’s long-term forecast projects that budget deficits will near the $1 trillion mark again by 2023, when it forecasts a $978 billion budget deficit.

What’s behind these perpetually large budget deficits? The CBO attributes the spending growth to the “pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.”

More specifically, the problem is entitlements. Unless action is taken — meaning that President Obama actually puts forward a plan — the CBO notes, “The aging of the population, increasing health care costs, and a significant expansion of eligibility for federal subsidies for health insurance will substantially boost spending for Social Security and for major health care programs relative to the size of the economy.”

Assuming that Congress passes the “doc fix,” which would prevent scheduled reductions in Medicare payments to doctors from taking effect, the CBO estimates that the national debt held by the public (excluding intragovernmental holdings) would ballon from $12.229 trillion (76% of GDP) in 2013 to $19.944 trillion (87% of GDP) by 2023. That scenario shows 10-year budget deficits totaling $9.492 trillion.

The economic effects of maintaining unsustainable spending, as the CBO notes, “would have serious negative consequences.” Here’s the most compelling paragraph from the report:

When interest rates rose to more normal levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges. Finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

To break that down into plain terms — we would become Greece.

The picture painted in the report isn’t pretty, but it’s a warning that has become all too familar over the last few years. While he remains steadfastly opposed to budget plans passed by the House of Representatives, President Obama hasn’t offered anything resembling a serious plan to tackle these mounting fiscal problems.

 
 


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