The national debt reached a new high this week, topping $19.4 trillion. For most of 2015, the level of debt was frozen at $18,112,975,000,000, just $25 million less of the statutory limit on the amount of debt the government can issue. The debt limit was suspended until March 15, 2017 by the Bipartisan Budget Act of 2015 early last November. Since enactment of that law, the debt has grown by $5 billion per day, on average, as the government continues to spend more than it collects in taxes.
The trend will continue, despite a projected increase in tax revenues. Over the next three decades, federal tax receipts will grow as a share of the economy, but will be outpaced by a spike in spending according to a CBO long-term budget outlook. These are the finding of the latest long-term budget outlook by the Congressional Budget Office (CBO). Like recent versions of this annual report, the outlook isn’t good. CBO foresees a rising tide of deficits, driven by growth in outlays for Social Security and federal healthcare programs (especially Medicare). And of course, as annual deficits continue their ascent, net interest payments on the debt will rise sharply as a percentage of Gross Domestic Product (GDP).
From 2000 through 2015, tax receipts have averaged 16.8 percent of GDP. CBO projected revenues will total 18.1 percent of GDP this year, and rise to an average of 19.1 per year in the long-term, representing an historic level of taxation. No ten-year period since 1940 saw a higher annual average than 18.3 percent; this high-mark was recorded twice: from 1992 to 2001 and from 1993 through 2002.
CBO found that an aging population will drive outlays for Social Security and federal healthcare programs: "By 2046, projected spending for those programs for people 65 or older accounts for about half of all federal noninterest spending." Social Security will grow from 4.9 percent of GDP in 2016 to 6.3 percent in the long-term. Total federal spending for the major health care programs, including Medicare, Medicaid, and the Children’s Health Insurance Program, and the Affordable Care Act, rose from 2.0 percent of GDP in 1985 to 5.5 percent in 2016, and is projected to rise to 8.9 percent by 2046.
Mandatory debt interest payments will also rise, putting additional pressure on the budget by limiting the amount of funding available for other programs. CBO forecasts that debt interest payments will balloon from 1.4 percent to 5.1 percent of GDP. And, of course, as annual deficits are allowed to accumulate, the federal deficit will swell. CBO forecasts that federal debt would reach 141 percent of GDP, far exceeding the 1946 peak of 101 percent. CBO notes that its prognostications are uncertain so far into the future, but that under several possible scenarios, debt could be as much as two times higher than it is now. An outside analysis of the report finds that the level of debt is likely even worse than CBO’s prognosis.
Freedom Partners (FP) observes that CBO’s long-term report does not include the intragovernmental debt in its calculation. This is the amount of money the government owes itself as money is borrowed from federal funds and accounts that are in surplus and used to finance spending in accounts with shortfalls. Applying totals of intragovernmental debt available in CBO’s ten-year budget outlooks, FP’s analysts estimate that by 2046, total federal debt would equal 170 percent of GDP, 23.5 percent higher than CBO’s predicts.
These findings should be a wake-up call to policymakers and the next President who, shortly upon taking office, will face a decision when the debt ceiling is reset next March. And it must be noted that while entitlement programs are leading the spending surge, both Donald Trump and Hillary Clinton have vowed not to implement cost-saving reforms to Social Security. Trump has stated at rallies, “We're going to save your Social Security without making any cuts. Mark my words.” Yet there is not one mention of “Social Security” on his campaign website indicating how he would achieve this. He has also replied to AARP that, “The key to preserving Social Security is to have an economy that is robust and growing.” He has also promised to cut out “waste, fraud, and abuse” in the system. If successful, these would help the situation, but more substantive reforms would still be needed to address Social Security’s looming insolvency.
Clinton on the other hand has proposals to expand the level of benefits paid out through the system by an average of $12.3 billion per year. She would also increase the maximum earnings, currently $118,500, on which individuals pay Social Security taxes. This massive tax increase would be expected to extend the solvency of the Trust Fund, but it would also lead to higher benefit payments over the long-term and could adversely impact wages and employment as employers must also pay for their share.
Donald Trump and Hillary Clinton have each provided more specifics regarding where they would increase spending than on ways to rein in the federal budget. Libertarian candidate Gary Johnson on the other hand, has identified specific federal programs and agencies he would seek to eliminate for savings. While it is unclear whether his polling numbers will be high enough to earn him an invitation to the presidential debates, the looming debt crisis should be part of those conversations when the candidates take the stage.