–Projects Federal Debt At Roughly 70% Of GDP By The End Of 2011

WASHINGTON (MNI) – The following text is the first part of a
summary of the U.S. Congressional Budget Office’s long-term budget
outlook published Wednesday:

Recently, the federal government has been recording budget deficits
that are the largest as a share of the economy since 1945. Consequently,
the amount of federal debt held by the public has surged. At the end of
2008, that debt equaled 40 percent of the nation’s annual economic
output (a little above the 40-year average of 37 percent). Since then,
the figure has shot upward: By the end of this year, the Congressional
Budget Office (CBO) projects, federal debt will reach roughly 70 percent
of gross domestic product (GDP)the highest percentage since shortly
after World War II. The sharp rise in debt stems partly from lower tax
revenues and higher federal spending related to the recent severe
recession. However, the growing debt also reflects an imbalance between
spending and revenues that predated the recession.

As the economy continues to recover and the policies adopted to
counteract the recession phase out, budget deficits will probably
decline markedly in the next few years. But the budget outlook, for both
the coming decade and beyond, is daunting. The retirement of the
baby-boom generation portends a significant and sustained increase in
the share of the population receiving benefits from Social Security,
Medicare, and Medicaid. Moreover, per capita spending for health care is
likely to continue rising faster than spending per person on other goods
and services for many years (although the magnitude of that gap is very
uncertain).

Without significant changes in government policy, those factors
will boost federal outlays sharply relative to GDP in coming decades
under any plausible assumptions about future trends in the economy,
demographics, and health care costs.

According to CBO’s projections, if current laws remained in place,
spending on the major mandatory health care programs alone would grow
from less than 6 percent of GDP today to about 9 percent in 2035 and
would continue to increase thereafter. Spending on Social Security is
projected to rise much less sharply, from less than 5 percent of GDP
today to about 6 percent in 2030, and then to stabilize at roughly that
level. Altogether, the aging of the population and the rising cost of
health care would cause spending on the major mandatory health care
programs and Social Security 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 for such spending as a share of the economy is
equivalent to about $750 billion today. If lawmakers ultimately modified
some provisions of current law that might be difficult to sustain for a
long period, that increase would be even larger.

Long-Term Scenarios

In this report, CBO presents the long-term budget outlook under two
scenarios that embody different assumptions about future policies
governing federal revenues and spending. Neither of those scenarios
represents a prediction by CBO of what policies will be in effect during
the next several decades, and the policies adopted in coming years will
surely differ from those assumed for the scenarios. Moreover, even if
the assumed policies were adopted, their economic and budgetary
consequences would undoubtedly differ from those projected in this
report because outcomes also depend on economic conditions, demographic
trends, and other factors that are difficult to predict. The report
focuses on the next 25 years rather than a longer horizon, because
budget projections grow increasingly uncertain as they extend farther
into the future.

The Extended-Baseline Scenario

One long-term budget scenario used in this analysis, the
extended-baseline scenario, adheres closely to current law. Under this
scenario, the expiration of the tax cuts enacted since 2001 and most
recently extended in 2010, the growing reach of the alternative minimum
tax, the tax provisions of the recent health care legislation, and the
way in which the tax system interacts with economic growth would result
in steadily higher revenues relative to GDP. Revenues would reach 23
percent of GDP by 2035much higher than has typically been seen in
recent decadesand would grow to larger percentages thereafter. At the
same time, under this scenario, government spending on everything other
than the major mandatory health care programs, Social Security, and
interest on federal debtactivities such as national defense and a wide
variety of domestic programswould decline to the lowest percentage of
GDP since before World War II.

That significant increase in revenues and decrease in the relative
magnitude of other spending would offset muchthough not allof the rise
in spending on health care programs and Social Security. As a result,
debt would increase slowly from its already high levels relative to GDP,
as would the required interest payments on that debt. Federal debt held
by the public would grow from an estimated 69 percent of GDP this year
to 84 percent by 2035. With both debt and interest rates rising over
time, interest payments, which absorb federal resources that could
otherwise be used to pay for government services, would climb to 4
percent of GDP (or one-sixth of federal revenues) by 2035, compared with
about 1 percent now.

-more (1 of 2)

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MCU$$$,MGU$$$,MFU$$$]