Federal debt held by the public is projected by 2046 to reach 141% of gross domestic product — approximately 25% higher than America’s historical peak of 106% after World War II — if tax and spending laws stay the same, according to a report conducted by the Congressional Budget Office.
The federal debt was equal to 39% of GDP at the end of fiscal year 2008 and has risen to 75% of GDP because of the financial crisis and recession. The report, released Tuesday, concludes that such large debts may pose significant risks for the country if debt rates continue to rise.
The CBO previously projected that the debt would rise to 107% of GDP in 2040. The CBO’s latest forecast is 14 percentage points lower than the 155% figure that it initially projected in January because the CBO now expects interest rates to be lower than previously anticipated.
“In CBO’s projections, deficits rise during the next three decades because the government’s spending grows more quickly than its revenues do. In particular, spending grows for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt,” the CBO said in its report.
Governments tend to finance their deficits by selling more debt. Yet, with interest rates on government securities are record lows, it’s inevitable for rates to rise in the long term.
“The federal government’s net interest costs are projected to rise sharply as a percentage of GDP for two main reasons,” the CBO said. “The first and most important is that interest rates are expected to be higher in the future than they are now, making any given level of debt more costly to finance. The second reason is the projected increase in deficits: The larger they are, the more the government will need to borrow.”
Growing national debt would hurt the economy, increasing the likelihood of a fiscal crisis and constrain budget policy in the future, the report said. Some of the policy recommendations to equal the average federal debt of GDP in the past 50 years (39%) would be to cut non-interest spending, increase revenues or do both by a total of 2.9% of GDP every year beginning in 2017.
“The longer lawmakers waited to act, the larger the necessary policy changes would become,” the CBO said in the report.
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On January 8, 1835, President Andrew Jackson proclaimed that the last installment of our national debt had been paid, and that the United States was debt free! This was the only time in American history that the U.S. had no debt.
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