The path we’re on:
- After a few years of decline, the federal budget deficit is expected to rise in 2016 and continue on an upward path indefinitely.
- The nonpartisan Congressional Budget Office forecasts that we will again reach $1 trillion deficits by 2022.
- Today, national debt held by the public is 75 percent of our economy and is set to continue to rise. Debt was 35 percent of the economy as recently as 2007.
- As a share of the economy, debt will grow to 86 percent in 2026. That is more than twice the 50-year average of 39 percent.
- Without action soon, national debt is on track to exceed 100 percent of the economy by 2033 and surpass the all-time record of 106 percent by 2035.
- By 2046, debt is projected to be at 141 percent of the economy and still on an upward path.
Drivers of the Debt:
- An aging population, rising health care costs, growing interest payments on the debt and insufficient revenue are the primary drivers of the long-term debt.
- Little has been done to address the long-term drivers of the debt through fundamental tax and entitlement reform.
- By 2038, 100 percent of the revenue we collect will go towards health care, Social Security, and interest payments.
- Interest payments on the debt represent the fastest growing part of the federal budget and will reach 13 percent of government spending by 2026 and will continue rising, crowding out critical investments.
- Our tax code’s wide array of deductions, exemptions, and loopholes – known as tax expenditures, or spending through the tax code – represented over $1 trillion in lost revenue for the Treasury last year alone.
- Tax expenditures would make up about one-quarter of federal spending if included in the budget.
Consequences of rising debt:
- Rising national debt will hamper public investment needed to grow the economy because federal spending on items like infrastructure, education and research will be crowded out by increased interest payments on the debt.
- Higher federal debt translates into higher interest rates down the road and less capital available for small businesses, large companies, and families to borrow and invest.
- Families will feel the effects of rising debt through increased costs of home loans, automobile loans, credit cards, and educational expenses because of higher interest rates.
- Interest rates would be 1 point higher 25 years from now because of high debt, according to CBO. Put another way, a family with a $300,000 mortgage can expect to pay at least $45,000 more over the course of the mortgage.
- The lack of investment because of high national debt will result in fewer job opportunities and lower wages.
- According to the Congressional Budget Office, wages will grow 10% less over the next two decades with debt on an upward path compared to a downward path. In today’s dollars, that’s more than a $7,000 wage cut. And over a 40-year career starting today, it represents $250,000 in lost income.
- Higher debt means leaving the next generation saddled with it, reducing their budget flexibility and the ability of the United States to respond to crises in the future – including economic, natural, and security emergencies.
Benefits of debt reduction done right:
- Beginning to phase in now spending cuts, tax increases, or some combination of both (excluding interest) of 2.6% of GDP would be sufficient to bring the debt gradually down to historical levels in the next 25 years.
- Waiting five years, however, would require adjustments of 3.2 percent of GDP and waiting 10 years would require 4.3%.
- Productivity growth would have to be 50% higher just to hold debt at its current record-high levels over the next quarter century.
- According to the Tax Policy Center, if we wanted to fix the debt only by raising taxes on those making over $250,000, the top rate would need to be over 100%.
- Policymakers need to enact a plan that stabilizes debt as a share of the economy and then puts it on a clear downward path this decade.
- Smart and gradual debt reduction can reverse all of the negative economic and generational consequences of elevated and rising debt.
- A credible plan could help strengthen the recovery by improving confidence and reducing uncertainty, even if savings don’t start until after the recovery.
- We estimate debt reduction alone could increase the size of the economy by as much as 4% by 2030.
- There are many proposals and ideas for policymakers to pick and choose from, including: the Simpson-Bowles Commission, Domenici-Rivlin task force, the Super Committee discussions, the Biden negotiations, and others.
- Every recent bipartisan deficit reduction plan has included progressive reforms that ask more from those who can afford it, protect low-income programs, and offer new enhancements for the most vulnerable.