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Long Term National Debt Forecast

With the White House and congressional Democrats out heralding the announcement that this year’s budget deficit will be the smallest during the Obama administration, some might get the impression that Washington is starting to get a handle on its spending issues. The Congressional Budget Office administered a dose of reality a couple weeks ago when it released its annual long-term forecast for the national debt.

Based on current law, CBO projects annual budget deficits to run in the range of 2.5 to 3 percent of GDP for 2015 thru 2018. This is an improvement over the size of deficits run during and after the 2008 recession. But the good times do not last, as the nonpartisan fiscal office of Congress sees annual deficits growing to an amount equaling 4 percent of GDP in 2024. For the ten years running from 2015 to 2024, CBO says the national debt would grow $7.6 trillion, based on current law.

In terms of the national debt, it is expected to begin escalating again in 2020. By 2024, the debt will equal 78 percent of GDP. That would be an increase of 6 percent over what it currently is. After that - the fiscal situation descends rapidly. CBO says that if currently policies stay in place, the national debt would equal 106 percent of annual GDP by 2039. The only time the country has been faced with such a situation was at the end of World War II. As a point of comparison, the national debt equaled less than 40 percent of GDP before the 2008 recession and Obama presidency.

What are the factors driving this? The aging of America’s population has long been viewed as a potential threat to the national budget, as have been the growth of entitlement programs like Medicare and Medicaid. But the implementation of Obamacare and its subsidies for health insurance are a major factor for the growth beginning in 2019. Also, the federal government has benefited from abnormally low interest rates. Economists and CBO both expect the cost of borrowing to start rising in the near future. This will cause a major rise in interest payment costs for the Federal government.

These forecasts should serve as a reminder for the need to implement serious budget reforms at the federal level. It also provides a stark comparison between how Washington spends money, and how the Legislature has implemented fiscal discipline in Iowa, restoring order to the state’s budget in the past four years.

If you have any questions or concerns, please contact me. Home phone: 515-382-2352; e-mail: Dave.Deyoe@legis.iowa.gov.

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