The Economy

CBO Sees U.S. Debt Reaching 107% of GDP in 2040

Budget deficits would not substantially increase at first, but eventually they would begin to rise, says the Congressional Budget Office.
Matthew HellerJune 17, 2015

Driven by growing budget deficits, U.S. government debt held by the public will exceed 100% of GDP in 2040, up from the current 74%, according to a new Congressional Budget Office report.

To keep the federal debt-to-GDP ratio at its current level, Congress would have to increase revenues by 6% or cut spending by 5.5% from levels under current laws in each of the next 15 years, the report said. In 2016, that would translate into about a $210 billion reduction in the deficit.

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Keith Hall, CBO

“To put the federal budget on a sustainable path for the long term, lawmakers would have to make major changes to tax policies, spending policies, or both,” the CBO said in the first major report under new, Republican-appointed director Keith Hall.

Without such changes, the CBO warned, the large federal debt would result in lower economic output and higher interest rates and those “macroeconomic effects would, in turn, feed back into the budget, leading to lower federal revenues and higher interest payments on the debt.”

In the shorter term, the non-partisan agency kept its forecast for this fiscal year’s deficit at 2.7% of GDP. Stronger economic growth and constraints on federal spending will keep the shortfalls close to that level through 2019, the CBO said.

Beyond that, higher interest rates and rising health-care and Social Security costs will boost spending, widening the deficit to 3.8% of GDP in 2025 and 6.6% in 2040, the report said.

Republicans have passed non-binding budget plans this year that propose to eliminate deficits within 10 years by cutting domestic spending by around $5 trillion over a decade.

“The question has never been if we should reduce the long-term deficit — the question is how,” Rep. Chris Van Hollen, the top Democrat on the House Budget Committee, told Reuters. “Democrats are committed to a balanced approach to reducing the deficit.”

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