The U.S. will become even more indebted in the coming years, and there is no clear way out.
Uncle Sam is on track to add more than $19 trillion in gross national debt over the next decade, according to the latest report from the Congressional Budget Office released on Wednesday.
The number is $3 trillion more than previously forecast, sparking renewed concerns about the government’s ability to pay its bills, especially as Congress remains gridlocked over raising the federal borrowing limit.
“The warning is that the fiscal trajectory is unsustainable,” Phillip Swagel, director of the budget office, told reporters at a briefing Wednesday afternoon.
The federal government is expected collect $65 trillion in revenue over the next 10 years. More than half of that comes from individual income taxes and another third comes from payroll taxes.
But the country will spend much more than what it collects. Rising interest payments, large federal stimulus bills, and the growing costs of Social Security and Medicare benefits for retiring baby boomers are some of the government’s largest spending items.
The Department of Health and Human Services is the federal agency expected to spend the most money over the next decade, followed by the Social Security Administration and the Treasury Department.
For this year alone, the CBO is projecting a $1.4 trillion gap, or deficit, between what the government spends and what it makes from tax revenues. Over the next 10 years, the annual deficit is expected to increase, reaching $2.7 trillion in 2033.
The 2033 deficit would account for 6.9% of the gross domestic product that year—a level exceeded only five times since 1946. And public debt in 2033 is projected to reach 118% of GDP, the highest level ever recorded. Public debt includes all federal debt held by individuals, corporations, state or local governments, foreign governments and other entities outside the U.S. government, minus Federal Financing Bank securities.
Even these striking numbers might still be too optimistic a projection, according to Jim Reid, head of global fundamental credit strategy at Deutsche Bank.
He noted the projections are assuming that the 10-year Treasury yield stays fairly constant around the 3.8% mark over the decade ahead—along with continuous economic growth rather than recessions or crises.
“If you look at the projection made in 2009, it thought that 2023’s debt [as a percentage of GDP] would be at 57.5% rather than 98.0%,” wrote Reid in a Thursday note.
The accumulating public debt means the government will need to pay more interest over the next decade. In 2033, the net interest on public debt is expected to make up 14% of the federal government’s total spending.
The last time that net interest made up such a large proportion of federal spending, in the mid-to-late 1980s, Washington did start paying more attention to deficit reduction, says Reid, but the process took place over many years.
“Over the long term, our projections suggest that changes in fiscal policy must be made to address the rising costs of interest and mitigate other adverse consequences of high and rising debt,” CBO director Swagel wrote in a Wednesday statement.
The current debt ceiling impasse reflects some lawmakers’ concerns about U.S. spending. The government reached its $31.4 trillion debt limit in January and needs to borrow more to pay its bills and debt interest. But Congress remains at a stalemate—as has happened in the past—over whether to raise the borrowing cap.
Although the Treasury could use extraordinary measures to continue meeting its obligations for some time, the CBO estimates that funding could be exhausted as early as July. Not raising the cap before the U.S. defaults on its debts could have a big impact on the country‘s economy, as well as the world’s.
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