Are we headed for fiscal trouble?

New analyses project that the amount of federal debt held by the public is expected to rise exponentially in the next ten years. Spending on Social Security and other programs is also expected to see a dramatic increase. 

J. Scott Applewhite/AP/File
The Capitol is seen in Washington (Monday, July 8, 2013).

As you consider the lavish promises of various presidential candidates, here’s a bit of useful context: Even without the effects of promised tax cuts or new spending, the long-term fiscal outlook is grim. Increased spending for health care and Social Security driven largely by demographics, the pressure to make permanent many temporary tax cuts, and rising interest costs will all push up deficits in future years.

According to a new analysis by my Tax Policy Center colleague Bill Gale and University of California at Berkeley economist Alan Auerbach, federal debt held by the public will rise rapidly from 75.6 percent of Gross Domestic Product today to 91 percent by 2025 and 152 percent by 2040.

Over the past decade the U.S. fiscal outlook has swung dramatically. Just before the Great Recession, the debt/GDP ratio had fallen to about 35 percent. In recent years, it has hovered at around 74 percent, quite high by post World War II standards.

But in their latest annual fiscal analysis, Gale and Auerbach project troubling increases in coming years. They raised their 2025 projection by 10 percentage points since last year (from 81 percent to 91 percent) and they’ve boosted their long-run forecast of debt from 120 percent of GDP in 2040 to 152 percent.

Their estimate is higher than the Congressional Budget Office baseline, which projected a 2040 debt/GDP ratio of 103 percent in its 2015 long-run budget forecast.

Why the difference? CBO is required to assume that current laws, including temporary tax provisions and sequester-based spending caps, won’t change. But Gale and Auerbach assume that Congress will make all remaining temporary tax cuts permanent and will permanently repeal the Affordable Care Act tax increases such as the medical device tax and the Cadillac Tax on high-cost employer-sponsored insurance plans. As a result, revenue would fall slightly from 18.3 percent of GDP this year to 17.9 percent by 2026. Over the last half-century tax revenues have averaged 17.4 percent of GDP.

They also assume that Congress will increase military spending to keep up with inflation and boost all other discretionary spending to track both inflation and population growth.

Under these assumptions, discretionary spending would exceed the spending caps Congress agreed to in 2011 and in 2013, though all discretionary spending would still decline by 0.6 percent of GDP.

At the same time, spending for Medicare, Medicaid, and Social Security will rise as the population ages. But the largest increase will come from rapidly rising interest costs.

Gale and Auerbach looked at borrowing costs under two different assumptions: if rates stay at their historically low levels and if they rise to more normal levels as projected by CBO. But because the amount the government will have to borrow will rise, so will debt service. Even if rates somehow stay low, Gale and Auerbach project the debt/GDP ratio would rise to 110 percent in 25 years.

If rates increase as CBO expects, net interest payments will grow by 3.2 percent of GDP and total spending will increase from 21.2 percent of GDP this year to 24 percent by 2026.

Of course, long-term budget forecasts are always a risky exercise. But Gale and Auerbach identify a trend that should serve as an important warning as you listen to presidential candidates make their campaign promises. Even without new spending and tax cuts, the debt is heading for a danger zone. When pols promise more largess, it is worth asking how they are going to pay for it. Then you can ask them what they’ll do to control the rising debt that is already baked in the cake.

This article first appeared at TaxVox. 

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