Washington and the Impact of the Unsustainable Debt Scenario

With the expiry of the temporary suspension of the national debt ceiling due on March 15, 2017, Washington loses its authority to continue borrowing from the future to pay for the present.  While Washington has a habit of kicking the “debt can” further and further down the road, eventually, the piper has to be paid.  An analysis on the Peter G. Peterson Foundation website looks at the fiscal and economic impact of the ever-rising national debt, giving us a sense of how Washington is mortgaging the futures of Main Street America.

Let’s open by looking at how the total federal debt has grown over the past five decades:

Here’s what the total federal debt looks like as a percentage of GDP:

At 104.8 percent of GDP, the total federal debt is just below its fifty-year high of 105.3 percent seen in Q1 2016 and is close to its World War II peak. 

A rising federal debt will eventually have an impact on government programs.  As the debt level rises (and, particularly when the rising debt level is accompanied by rising interest rates), the federal government has two choices to make; reduce spending to cover the rising cost of interest on the debt or increase taxes, again to cover rising interest costs.  Over the next decade, the Congressional Budget Office estimates that interest costs will total $4.8 trillion, money that could well be spent on programs that actually improve the welfare of American families.  

Here is a graphic showing how interest rates are projected to be the largest category of federal spending by 2050:

Here is a graphic showing how mounting interest costs will impact the size of the deficit as a percentage of GDP by 2046:

To keep the debt as a percentage of GDP at the same average level that it has been at over the past 50 years (39 percent, in case you were wondering), Washington would have to cut non-interest spending, raise taxes or some combination of the two by a total of 2.9 percent of GDP in 2017.  This would mean a change spending/revenue totalling $6.7 trillion from 2017 to 2026.  Obviously, the longer that the federal government takes to make the necessary spending/revenue adjustments, the more painful they will be for taxpayers and program recipients on a going-forward basis. 

A rising federal debt also has an impact on economic opportunities for Americans.  When measured using real incomes (i.e. after correcting for inflation), the CBO estimates that the projected rise in the federal debt would reduce the real income for a 4-person family by as much as $12,000 in 2046, a 3.4 percent loss in income when compared to a scenario where the federal debt level stabilizes at its current level.

Here is a graphic showing how the rise in the federal debt will impact family incomes on a going-forward basis:

Let’s go back to looking at what Washington may have to do to prevent this debt issue from getting further out of control.  As I noted above, to return the debt-to-GDP level to the 50 year average of 39 percent, lawmakers would have to invoke a combination of spending cuts and revenue increases that totalled 2.9 percent of GDP or about $560 billion or $1,700 per person starting in fiscal 2017.  Here are some suggestions from the Congressional Budget Office:

1.) Cut all types of non-interest spending by equal percentages – this would represent a decrease of about 14 percent for each of the next 30 years.  Such a cut would reduce initial annual Social Security benefits by an average of $2,600 for income earners born in the 1950s, who claimed benefits when they turned 65 and who earned in the middle quintile of lifetime earnings.

2.) Increase revenues by equal percentages – this would represent an increase of about 16 percent for each year in the decade from 2017 to 2026.  Such a revenue increase would increase annual household federal taxes by an average of $1,900 for households in the middle quintile of the income distribution.  

It’s pretty obvious that the fiscal situation in the United States is not sustainable over the long-term.  Unfortunately, with an intransigent and highly polarized Congress and Executive Branch, it is highly unlikely that any meaningful and long-term progress will be made during the upcoming debt ceiling crisis.  That said, on the upside, there has to be a way that Washington can blame the Russians for this looming fiscal disaster zone.  Like the poop on the carpet, Putin is to surely the cause of this mess one way or another.

Click HERE to read more.


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