The National Debt Is Over $18 Trillion, Not $13 Trillion by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
July 14, 2015
IN THIS ISSUE:
- CBO’s Latest 2015 Long-Term Budget Outlook
- Why is Our National Debt Exploding So Rapidly?
- Intra-Governmental Debt Counts Toward National Debt
- Is Government Account Series Debt a Federal Liability? Yes!5. Bottom Line: National Debt is $18+ Trillion, Not $13, Trillion
In June, the non-partisan Congressional Budget Office (CBO) released its annual “Long-Term Budget Outlook” which concluded yet again that the trajectory of US federal debt is “unsustainable” and will lead to an unprecedented debt crisis in the years ahead.
After running $1+ trillion annual budget deficits in fiscal years 2009-2012, the deficits have come down significantly in the last few years, to $483 billion in FY2014, down from $1.3 trillion in 2011. However, the CBO warns in its latest report that the debt will start to ratchet significantly higher in a few more years if major changes are not made soon.
The CBO estimates that “debt held by the public” will rise to 78% of Gross Domestic Product by 2025 and 103% of GDP by 2040 – assuming its long-term assumptions hold true. Several of those assumptions are dubious in my opinion. The CBO admits as much and offers an alternative fiscal scenario which shows the debt rising to over 100% of GDP much sooner.
The problem I have always had with the CBO’s debt numbers is that they only consider the debt held by the public, which is currently apprx. $13.1 trillion. The CBO does not include the additional apprx. $5.2 trillion of so-called “intra-governmental debt” which is owed by various governmental agencies including Social Security.
If we add the intra-governmental debt, then our national debt leaps to apprx. $18.3 trillion today, which is actually larger than our GDP of $17.7 trillion at the end of 2014. So our real debt-to-GDP ratio is already above 100%! That’s what we will talk about today. All Americans should understand what follows.
Finally, it is widely agreed that the latest nuclear agreement with Iran is a victory for the Iranians and a dangerous setback for the West, thanks to President Obama. While I don’t have space to address it today, be sure to read the first link in SPECIAL ARTICLES below which points out 16 reasons why this was a very bad deal.
This is just another example that illustrates how our president does not have America’s best interest at heart.
CBO’s Latest 2015 Long-Term Budget Outlook
In its 2015 Long-Term Budget Outlook, the non-partisan Congressional Budget Office warned once again that federal debt is on an unsustainable path. Unless policymakers act soon, the CBO warns that rising debt will jeopardize long-term economic growth, crowd out critical public investments, reduce policymakers’ flexibility to respond to unforeseen events and raise the risk of a fiscal crisis.
The CBO’s Long-Term Budget Outlook includes the following projections, trends and analysis:
- By 2040, federal debt will climb to over 100% of GDP under current law, and could reach 175% of GDP under less optimistic assumptions.
- Rising national debt is the result of a structural imbalance between revenues and spending, fueled primarily by two main drivers: the aging of the population and healthcare cost growth.
- Interest costs on federal debt are projected to grow rapidly: by 2022, they could exceed what the federal government has historically spent on R&D, infrastructure, and education combined, and could exceed them by more than three times by 2050.
- Rising debt will harm our economy and slow the growth of productivity and wages: CBO estimates that it could reduce average real (inflation-adjusted) income per person by as much as $6,000 in 2040.
Significant changes to some combination of spending and tax policies will be required to help get our long-term debt on a sustainable path, and the CBO’s latest report concludes that taking action now to address these trends would provide significant benefits.
As CBO states, “The sooner significant deficit reduction was implemented, the smaller the government’s accumulated debt would be; the smaller the policy changes would need to be to achieve the chosen goal; and the less uncertainty there would be about what policies might be adopted.”
The CBO estimates that federal debt held by the public, which is already at record levels, will climb significantly over the next 25 years. In CBO’s latest projections, debt is expected to climb from 74% of GDP in 2015 to 103% of GDP in 2040 (assuming no changes in current law). But under less optimistic assumptions, CBO projects that debt could soar to a staggering 175% of GDP by 2040.
Debt at 175% of GDP would be unprecedented. Over the past 50 years, debt averaged only 38% of GDP and, as recently as 2007, was as low as 35% of GDP. Since 1790, our debt has never exceeded 100% of GDP, except for a brief time during World War II, after which the debt fell rapidly as a share of GDP.
Absent major reforms, our growing debt will have serious and far-reaching economic consequences. The CBO warns that these levels of debt would:
“…have significant negative consequences for the economy in the long term and would impose significant constraints on future budget policy. The projected amounts of debt would reduce the total amounts of national saving and income in the long term; increase the government’s interest payments, thereby putting more pressure on the rest of the budget; limit lawmakers’ flexibility to respond to unforeseen events; and increase the likelihood of a fiscal crisis.”
Rising debt will slow the growth of the economy by crowding out private and public investment, thereby slowing the growth of productivity and workers’ wages. The CBO estimates that rising debt could reduce average real (inflation-adjusted) income per person by as much as $6,000 in 2040, relative to what it would be if the debt was stabilized at today’s levels. This represents a 7.5% loss in income.
Why is Our National Debt Exploding So Rapidly?
The growth of our debt stems from a fundamental imbalance between spending and revenues. Under current law assumptions, CBO anticipates that federal spending will grow from 20.5% of GDP in 2015 to 25.3% of GDP in 2040. Revenues are also projected to increase during this period, growing from 17.7% of GDP in 2015 to 19.4% in 2040 – but not by nearly enough to match the projected growth of federal spending.
Under less optimistic alternative assumptions, the mismatch between spending and revenues is even more pronounced. CBO projects that spending could soar to 30.4% of GDP in 2040, while revenues grow only slightly and stabilize at 18.1% of GDP.
Much of the growth in total spending will be caused by growing interest costs, which in turn further increases federal debt. Indeed, over the next 25 years, more than half of the growth in federal spending is projected to come from rising interest costs.
Yet those growing costs are avoidable if lawmakers enact policies that put our debt on a sustainable path – not likely, no matter which party rules.
Beyond interest costs, 100% of the growth in non-interest spending (as a percentage of GDP) comes from Social Security and the major healthcare programs, under current law. Healthcare by itself