CBO: $900B a year needed to stabilize post-crisis debt

A fiscal plan to restore the nation’s debt to pre-coronavirus levels will require spending cuts and revenue increases amounting to $900 billion a year for a quarter century, according to the nonpartisan Congressional Budget Office (CBO).

Its long-term budget projections, released Monday, found that if the United States takes fiscal action in 2025, immense changes to spending and taxing would be needed to stabilize the debt at its pre-crisis level of 79 percent gross domestic product (GDP).

CBO Director Phillip Swagel called the long-term fiscal challenge “daunting,” though not an immediate crisis.

“There is no set tipping point at which a fiscal crisis becomes likely or imminent, nor is there an identifiable point at which interest costs as a percentage of GDP become unsustainable,” Swagel said

“But as the debt grows, the risks become greater.”

CBO’s latest projections see the debt rising to 98 percent of GDP in 2021, and on track to surpass the historical debt record of 106 percent in 2023.

With a high level of debt, the interest that the government has to pay out every year is set to grow faster than any other spending category, making it harder for the U.S. to spend on its priorities.

By the 2040s, the government will spend more on servicing debt than Social Security. It will eclipse the combined sum of defense and domestic discretionary spending. 

Michael Peterson, CEO of the anti-debt Peterson Foundation, said the rise in interest costs was troubling.

“For many years, our national debt has been growing rapidly due to well-known structural problems, including an aging population, rising health care costs and compounding interest — combined with insufficient revenues to meet our commitments,” he said. 

“It’s tragic that interest on the debt is the fastest growing part of the budget, when we have so many other important priorities that need resources.”

One bright point is that reduced interest rates have actually brought projected net interest spending down from last year’s projections over the next decade, after which they are on track to rise precipitously faster.

The report said by 2050, the debt will have grown to 195 percent of GDP, nearly twice the size of the economy and an immense leap from its 35 percent level in 2007, before the Great Recession.

The significant response to the COVID-19 pandemic, which economists widely agree is key to keep the economy from imploding, is set to add 45 percentage points to the debt over 30 years.

“Recent borrowing was necessary to fight this devastating pandemic and economic downturn, but there is no excuse to continue high rates of borrowing once the pandemic is behind us,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

“Sadly, politicians spent the latter half of the last decade cutting taxes and hiking spending, while also failing to address the rising costs of our health and retirement programs.”

The CBO report noted that deficits had been on an upward trajectory before the virus hit, rising from $587 billion in 2016 to nearly $1 trillion last year, a two-thirds increase.

The extraordinary stimulus efforts are expected to raise that level to $3.3 trillion this year alone, and add $600 billion to the deficit next year as well.

Questions over spending levels have plagued talks for an additional COVID-19 relief bill, with Democrats pushing for a larger rescue package and Republicans raising alarms over spending levels.