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Debt, Doom, and America’s Future

According to Jeff Dunetz at Andrew Breitbart’s Big Government today, the Congressional Budget Office (CBO) report, released earlier today, “warns of economic doom for America.” Jeff writes:

“America is about to be handcuffed. No, we didn’t collectively break some law leading to us being arrested and having to suffer through the traditional “perp walk.” The latest Congressional Budget Office (CBO) projection of our long term debt indicates it will be so burdensome that it will limit  lawmakers’ ability to adopt tax and spending priorities in good times and reduce flexibility to deal with recessions. The report says that our high debt will make financial crises more likely and long term growth less likely.”

Here’s how CBO summarized their report in the abstract:

This Congressional Budget Office (CBO) report presents the agency's projections of federal spending and revenues over the coming decades. Under current law, an aging population and rapidly rising health care costs will sharply increase federal spending for health care programs and Social Security. If revenues remained at their historical average share of gross domestic product (GDP), such spending growth would cause federal debt to grow to unsustainable levels. If policymakers are to put the federal government on a sustainable budgetary path, they 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. In keeping with CBO's mandate to provide objective, impartial analysis, this report makes no recommendations.

Here are the report’s “key points” as described by the CBO director himself at his blog:

“The retirement of the baby-boom generation is a key factor in the nation’s long-term fiscal outlook. It portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid. Moreover, under current law, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services.

“As a result, if current laws remained in place, the federal government’s spending on Social Security and the major mandatory health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and the health insurance subsidies that will be provided through insurance exchanges) is projected to grow from roughly 10 percent of GDP today to about 15 percent of GDP 25 years from now. (By comparison, spending on all of the federal government’s programs and activities, excluding interest payments on debt, has averaged about 18.5 percent of GDP over the past 40 years.) That combined increase of roughly 5 percentage points of GDP is equivalent to about $750 billion today.

"CBO presents the long-term budget outlook under two scenarios that embody different assumptions about future policies governing federal revenues and spending.

  • The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections through 2021 and then extending the baseline concept for the rest of the long-term projection period. Under that scenario, revenues would reach 23 percent of GDP by 2035—much higher than has typically been seen in recent decades—and larger percentages thereafter. Nevertheless, annual spending would be greater, and federal debt held by the public would grow from an estimated 69 percent of GDP this year to 84 percent by 2035. (At the end of 2008, that debt was equal to 40 percent of GDP.)
  • The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period. Under that scenario, which many budget analysts believe is a more realistic picture of the nation’s underlying fiscal policies, revenues would remain close to their historical average of 18 percent of GDP, and federal debt would exceed 100 percent of GDP by 2021 and would balloon to nearly 190 percent by 2035.

"Those projections of federal debt under the long-term scenarios do not include the harmful effects that rising debt would have on economic growth and interest rates. If those effects were taken into account, projected debt would increase even faster."

At the CBO webpage for the 2011 Long-Term Budget Outlook, there are links to the full summary, full document, and supplemental material such as the director’s blog and an Excel spreadsheet of the underlying data. Don’t rely on the mainstream media to translate reports; rather, read the actual source material.

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