CBO director Doug Elmendorf: U.S. debt to reach 85% to 190% total GDP by 2035

CBO director Doug Elmendorf warned of the “daunting” long-term budget outlook of the United States during his testimony before the House Budget Committee.

TRANSCRIPT (6/23/11):

“Thank you, Mr. Chairman and Congresswoman Schwartz to you and all the members of the committee.

“The budget outlook of the United States is daunting both during the next decade and over the longer term. As the economy recovers from the severe recession and policies adopted in response, and the recession phase out, budget deficits would decline markedly in the next few years.

“However, the retirement of the baby boom generation portends a significant and sustained increase in the share of population eligible for Social Security, Medicare, and Medicaid benefits. Moreover, per capita spending for health care will probably continue rising faster than spending on other goods and services.

“In addition, the recession and accompanying polices are leaving a legacy of greatly increased government debt. Between the end of fiscal year 2008 and the end of the current fiscal year, debt held by the public will surge from roughly 40% of GDP – close to its 40-year average – to nearly 70% of GDP – the highest since shortly after World War II.

“Therefore, we face the budget pressures of an aging population and rising health care costs from a significantly worse starting point than was envisioned just a few years ago.

“CBO analyzed the long-term budget outlook under two scenarios that embodied different assumptions about future policies. Although there are great uncertainties about future economic conditions, demographic trends, and other factors, we think that the broad implications of our broad analysis would be the same under reasonable alternative assumptions.

“Here are our findings: Under one scenario – our extended baseline scenario – debt held by the public would increase slowly from its already high level relative to GDP, reaching about 85% by 2035. That scenario adheres closely to current law. It can be summarized in three broad categories.

“First, spending on the major health care programs and Social Security is projected to grow substantially from 10% of GDP today to 15% 25 years from now. Most of that increase will be for spending on the major health care programs: Medicare, Medicaid, CHIP, and subsidies to be provided through insurance exchanges, which would grow from less than 6% of GDP today to 9% in 2035. Spending on Social Security is also projected to rise but much less sharply.

“Second in this scenario, given the assumptions that underlie our baseline projections, government spending on everything other than interest payments on the debt and the programs I’ve just mentioned – this includes programs on defense and a wide array of programs – that category of spending will decline to the lowest share of GDP since before the Second World War.

“And third in this scenario, expiration of the tax cuts enacted since 2001 and the growing reach of the alternative minimum tax, the tax provisions of last year’s health care legislation, and the way in which the tax system interacts with economic growth would all result in steadily higher revenues. Revenues will reach 23% of GDP by 2035, much higher than has been seen in the past. That significant increase in revenues and decrease in relative amount of other spending would offset much but not all of the rise in spending on health care programs and Social Security. So even with revenues at historically high levels, debt would continue to rise.

“However, the budget outlook is much bleaker than that under an alternative fiscal scenario in which federal debt would grow much more rapidly, exceeding 100% of GDP by 2021 and approaching 190% by 2035. That scenario, which more closely approximates current policies, incorporate several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period.

“Most important are the assumptions about revenues. Under this scenario, we assume that the tax cuts enacted since 2001 will be extended, that the reach of the alternative minimum tax will be restrained, and that over the long run tax laws will evolve further so that revenue remain near their historical average of 18% of GDP.

“The scenario also incorporates assumptions about Medicare’s payment rates for physicians that they will remain at current levels rather than declining by about a third at the end of this year as under current law. And that some policies enacted last year to restrain growth in health care spending by the federal government will not continue in effect after 2021.

“In addition, the alternative scenario includes an assumption that spending on all other activities will not fall quite as low as under the extended baseline scenario although it will still fall close to its lowest level in the entire post-war period. It’s important to note further that these projections do not incorporate the harmful effects that rising debt would have on economic growth and on interest rates.

“Incorporating economic feedbacks – as we do in the second chapter of the report – debt under this alternative scenario will be well over 200% of GDP in 2035, if such a thing could come to pass.

“Implications of these analysis are clear. There is a substantial mismatch between what the government would have to spend to maintain existing programs in their current form and the revenues that taxpayers are accustomed to providing. To keep deficits and debts from climbing to unsustainable levels, policymakers will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that long-term changes to tax and spending policies are agreed upon and the sooner they’re carried out once the economy recovers, the smaller will be the damage to the economy from growing federal debt. Thank you.”



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