In "Catastrophic" Scenario, CBO Projects US Debt/GDP Hitting 247%

The CBO released its latest long-term budget outlook today, and found that America's financial situation continues to deteriorate. While there were not many notable variations from the last forecast, there were some notable differences.

A quick summary of the latest financial situation:

At 78% of gross domestic product (GDP), federal debt held by the public is now at its highest level since shortly after World War II. If current laws generally remained unchanged, the Congressional Budget Office projects, growing budget deficits would boost that debt sharply over the next 30 years; it would approach 100 percent of GDP by the end of the next decade and 152% by 2048 (by comparison, in its March 2017 forecast, public debt was estimated at 113% of GDP in 2017 rising to 150% by 2047). That amount would be the highest in the nation’s history by far. 

Moreover, if lawmakers changed current law to maintain certain policies now in place— for example preventing a significant increase in individual income taxes in 2026 as Trump has been suggesting — the result would be even larger increases in debt.

A breakdown of projected spending and revenue over the next 30 years is shown below.

This is how the breakdown by key spending and revenue components would change from 2018 to 2048.

On the GDP side, the CBO forecasts average annual growth of 1.9% for the 2018-2048 period, an increase from the 1.4% average over the past decade.

The CBO also forecasts inflation of 2.4% and unemployment of 4.6% for the 2018-48 period.

More troubling is the CBO's projection of interest rates which will rise from their currently low levels and as debt accumulates, putting increasing pressure on government finances and push interest payments to record levels in the coming decades.

Specifically, the rising levels of federal debt would push debt payments from 1.6% of the gross domestic product in 2018 to 3.1% in 2028 and 6.3% in 2048, which would be the highest level ever. At that point, interest payments would equal spending on Social Security.  Those payments would help put overall federal spending to 29% of GDP for the first time since World War II.

What was perhaps most notable is that as part of its admission that there is no way of accurately predicting the true state of the US economy in 30 years, the CBO noted that in order to illustrate the uncertainty of its projections, the Budget Office examined the extent to which federal debt as a percentage of GDP would differ from the amounts in its extended baseline if the agency varied four key factors in its analysis.

  • The labor force participation rate
  • The growth rate of total factor productivity,
  • Interest rates on federal debt held by the public, and
  • Excess cost growth for Medicare and Medicaid spending.

Where it gets interesting is in the CBO's admission that if CBO varied one factor at a time, federal debt held by the public after 30 years would range from 42 percentage points of GDP below the agency’s central estimate—152 percent of GDP—to 60 percentage points above it.

And here is the worst case outcome: If all four factors were varied simultaneously such that projected deficits increased, federal debt held by the public in 2048 would be about 96% of GDP above CBO’s central estimate.

Or, in other words, the CBO admits that if everything went wrong, US debt/GDP in 2048 would be a catastrophic 247%, a number that would make even Japan blush.

What would the soaring debt burden do to the US?

Large and growing federal debt over the coming decades would hurt the economy and constrain future budget policy. The amount of debt that is projected under the extended baseline would reduce national saving and income in the long term; increase the government’s interest costs, putting more pressure on the rest of the budget; limit lawmakers’ ability to respond to unforeseen events; and increase the likelihood of a fiscal crisis.

And here is the CBO's sullen admission of how the hyperinflationary endgame would look like:

In that event, investors would become unwilling to finance the government’s borrowing unless they were compensated with very high interest rates.

The CBO's parting words are hardly a source of comfort:

Those calculations do not cover the full range of possible outcomes, and they do not address other sources of uncertainty in the budget projections, such as the risk of an economic depression or a major war or catastrophe, or the possibility of unexpected changes in rates of birth, immigration, or mortality. Nonetheless, they show that the main implications of this report apply under a wide range of possible values for some key factors that influence federal spending and revenues. In 30 years, if current laws remained generally unchanged, federal debt— which is already high by historical standards—would probably be at least as high as it is today and would most likely be much higher.

Policymakers could take that uncertainty into account in various ways as they make choices for fiscal policy. For example, they might design policies that reduced the budgetary implications of certain unexpected events. Or they might decide to provide a buffer against events with negative budgetary implications by aiming for lower debt than they would in the absence of such uncertainty.

Policymakers could take that uncertainty into account, but they won't, and instead what is much more likely is that when the next perfect storm hits the US economy, whoever is in charge will do what the US has done every time there was a crisis: issue even more debt, and bring the financial system that much closer to failure. Then again, in 30 years even if the "catastrophic" scenario for the US were to come true, one can only wonder what shape the rest of the world would be in...