CBO Report: After Doubling In Last Six Years, Debt Will Explode In Coming Decades
Budget Office Confirms That Reining In Debt Would Promote Economic Growth
The latest Long-Term Budget Outlook of the
CBO has repeated its warning that large and continually growing debt increases the probability of a fiscal crisis striking
The long-term outlook has worsened since CBO's last report in
A significant portion of the debt buildup comes from paying interest costs on the accumulated debt. Because every penny of the interest expense must itself be borrowed, the stock of debt rises as the return to more normal rates of interest increase debt service costs. A single year's interest payments are estimated to grow from
The other major pressures on the long-term budget outlook come from growing spending for
CBO also provides an alternative fiscal scenario, which assumes that the spending controls required by the Budget Control Act are abandoned, that future changes to the
CBO's report underscores the destructive economic consequences of growing deficits and rapidly rising federal debt. Consistent with the consensus view of nearly all economists, CBO finds that rising debt slows the economy as private borrowers find themselves competing with the federal government for available credit. Because lenders generally believe that public debt is a safer investment than private debt, private firms are "crowded out" of credit markets by the U.S. Treasury. In addition, income tax bracket creep slowly increases effective marginal tax rates, which reduces the pace of economic activity. Finally, larger transfer payments to working-age adults discourage participation in the economy and boost the drop-out rate, which further slows the rate of economic growth and undermines job creation.
One way to see the effects of a slower economy is through the slowdown's effects on per person wealth in the extended baseline. The slower economy reduces inflation-adjusted GNP per person when compared with better debt outcomes in the first 10 years of CBO's 25-year outlook. The per-capita effects are substantial: a
Another way to view the effects of our worsening fiscal condition on the economy is to gauge how much lower or higher the level of GNP would be if debt is better or worse than the extended baseline. Under the "worst case" alternative fiscal scenario, CBO estimates that the level of GNP could be as much as 8 percent lower, with a central estimate of 5 percent lower. However, if
In sum, CBO's report shows that lower deficits yield significant economic benefits: more wealth per person and better overall economic opportunities. In addition, with lower deficits, the federal budget outlook brightens as revenues naturally rise through economic growth and fewer Americans require government assistance.
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