It's no longer popular in Washington these days to discuss the nation's long-term debt problem, but a report released on Tuesday by the Congressional Budget Office provided a stark reminder that a looming crisis is approaching, and the longer the nation waits to address it, the more difficult it will be to avert.
In the immediate term, with the economy doing better than it had been, annual deficits have shrunk substantially from where they were in the beginning of this decade. But this trend, the CBO has projected, will be short-lived, and deficits will soon be on the rise again, pushing the debt to unsustainable levels.
CBO identified the primary drivers of the rising debt to be the aging of the population and rising health care spending, a trend that was accelerated by President Obama's health care law due to the increase in Medicaid spending and subsidies for individuals to purchase insurance on government-run exchanges. In addition, CBO anticipates that interest rates will rise from their currently low levels, further adding to the debt.
In 2007, debt held by the public was 37 percent of gross domestic product, and it has since doubled to its current 74 percent. Assuming that current laws remain the same, the CBO projects that by the time a girl born today graduates from college in 2036, the nation's debt will be as large as an entire year of U.S. economic output, and it will continue to grow.
In an alternative scenario under which Congress makes certain predictable policy changes, that point would be crossed even earlier, according to the CBO, merely 15 years from now.
Though Obama and his liberal supporters have identified insufficient levels of taxation on wealthier Americans as the major problem, the CBO report finds that revenue will increase in the coming decades, reaching 19.5 percent of the economy by 2039 -- which is significantly higher than the 17.5 percent average over the last four decades.
The problem is that federal spending will accelerate at a much faster rate, reaching nearly 26 percent of the economy by the same year.
CBO warned that the growing debt could crowd out private investment and drive up interest payments (which, in turn, would make the debt even higher.)
In addition, the report warned, the debt problem would “restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, those challenges would tend to have larger negative effects on the economy and on people’s well-being than they would otherwise. The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.”
As things stand, the debt problem has become so severe that major reforms are needed to bring it down to a sustainable level. For instance, if lawmakers set the goal of bringing debt as a percentage of the economy to 39 percent by 2039 — the level it’s averaged over the past 40 years — it would require either spending cuts, tax increases, or some combination of both, equaling 2.6 percent of GDP starting in 2015. That would represent $465 billion in that year alone, and then the equivalent level of savings would have to be generated each year for 25 years.
CBO also noted that the sooner changes are made, the less severe the policy changes would need to be. For instance, achieving the same debt reduction mentioned above would require annual savings of 3.2 percent of GDP if lawmakers waited until 2020, and 4.3 percent if lawmakers waited until 2025 (roughly translated, that would be the equivalent of over $700 billion in 2013 dollars.)
Obama, always reluctantly forced into the debt reduction conversation, has no interest in addressing the long-term issue. Republicans, meanwhile, have grown weary of debt fights and worry that emphasizing debt reduction is no longer a winning election issue.
Washington can ignore the problem, but that won’t make it go away. It will just make the solution that much harder.