The Economy

CBO Raises 2040 Debt Forecast to 122% of GDP

“The prospect of such large debt poses substantial risks for the nation and presents policymakers with significant challenges,” CBO warns.
Matthew HellerJuly 14, 2016

If current tax laws and government spending remain generally the same, the federal debt will nearly double as a percentage of GDP over the next 30 years, according to the Congressional Budget Office.

In its latest Long-Term Budget Outlook, CBO projected the debt will climb from a current 75% of GDP to 122% by 2040 and to 141% by 2046. The projection for 2040 is up from CBO’s previous estimate of 107% and well above the post-World War II peak of 106%, reflecting both slower economic growth and last December’s congressional pact to make permanent a series of tax provisions.

“The prospect of such large debt poses substantial risks for the nation and presents policymakers with significant challenges,” the report warned, citing an increased likelihood of a fiscal crisis as one possible consequence.

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The projected debt for 2046, though, is down 15 percentage points from CBO’s previous estimate, primarily because it now expects interest rates to be lower than previously anticipated. Over the long-term, CBO estimates that the 10-year Treasury rate, after inflation, will reach just 1.9%, down from forecasts of 2.2% last year and 3% in 2013.

“Lower interest rates effectively offset the costs to the government of slower growth and higher deficits,” The Wall Street Journal noted. “Interest spending is projected to reach 4.8% of GDP in 2040, up from last year’s estimate of 4.7%.”

CBO cautioned that its debt projection over the next 30 years is “very uncertain,” noting that if four key variables — labor force participation, productivity in the economy, interest rates on federal debt, and health-care costs per person — differ from their baseline levels, the debt could range from nearly twice the largest amount recorded in U.S. history to slightly less than that record high.

“Taking all factors into account, CBO concludes that despite the considerable uncertainty of long-term projections, debt as a percentage of GDP would probably be greater — in all likelihood, much greater — than it is today if current laws remained generally unchanged,” CBO said.