The path we’re on:
- Though the federal budget deficit has decreased in the past few years, this decline follows an unprecedented increase in the deficit in prior years and remains high by historical standards.
- While deficits are coming down from post-World War II highs, they are predicted to begin rising again in 2016.
- The nonpartisan Congressional Budget Office forecasts that we will return to $1 trillion-plus deficits by 2022.
- Over the past 40 years, the size of U.S. public debt has averaged below 40% of the economy, after having peaked at over 100% during WWII.
- Today, public debt is more than 72% of our economy, but is set to continue to rise even after the economy recovers from the recent downturn.
- The Congressional Budget Office projects public debt will reach 78% of the economy by 2024. That is twice the historical average of 39% of the economy over the past 40 years.
- Even with deficits falling recently, public debt is still over 72% of the economy. Debt was 35% of the economy as recently as 2007.
- Without action soon, public debt is on track to exceed 100% of the economy by 2035.
- National debt is on track to grow by $8 trillion over the next decade.
- By late next decade, 100% of the revenue we collect will go toward interest payments and mandatory spending.
- Since August 2010, Washington has enacted $4.1 trillion of deficit reduction over 10 years, assuming future sequestration cuts are allowed to take place. Most of the enacted savings comes from the discretionary budget, which is a small and shrinking share of the federal budget, and from tax increases that cannot grow nearly as fast as our health and retirement programs.
- Debt remains on an upward path, and an additional $2.2 trillion in deficit reduction would be necessary simply to stabilize debt levels at 70% of GDP through 2024, which is still nearly twice the historical average.
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.
- Ten years from now, three-fourths of all federal spending will go to mandatory items (mostly health care programs and Social Security) and interest on the debt.
- Interest payments on the debt represent the fastest growing part of the federal budget and will reach 17% of the budget by 2030 and will continue rising, crowding out critical investments.
- An unexpected 1 percentage point increase above projected rates would cost the country $1.2 trillion over a decade, and if interest rates returned to the record-high levels of the 1980s, the country would pay $6.2 trillion more in interest.
- Our tax code’s wide array of deductions, exemptions, and loopholes – known as tax expenditures, or spending through the tax code – represent $1.3 trillion in lost revenue for the Treasury this year alone.
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 could be 0.3 points higher if federal debt is growing as opposed to shrinking as a share of the economy. Put another way, a family with a $300,000 mortgage can expect to pay at least $20,000 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 11% 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 $330,000 in lost income.
- Ultimately, we will face an economic crisis if we don’t change course as recently occurred across Europe.
- 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 3.1% of GDP would be sufficient to bring the debt gradually down to historical levels in the next 75 years.
- Waiting ten years, however, would require adjustments of 3.6 percent of GDP and waiting 20 years would require 4.4%.
- 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 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.