A sample of the CBO's budget projections, via the newly released CBO… (Congressional Budget Office…)
WASHINGTON -- The Congressional Budget Office warned the nation’s public debt load is projected to hit dangerously high levels by September – roughly 70% of the nation’s gross domestic product -- a milestone not seen since World War II, underscoring the crucial decisions facing Washington and the candidates in this presidential election year.
The report Tuesday from the nonpartisan budget office throws into stark terms the challenges facing the U.S. economy and the dangers of congressional inaction. Allowing debt levels of that size to grow would ripple across the economy in years to come, slashing gross domestic product and threatening a fiscal crisis.
At the same time, the CBO has warned that any attempt by politicians in Washington to quickly bring the budget into balance with new taxes or spending cuts carries its own risks: Such sudden moves, as lawmakers are considering for the end of this year, could throw the economy into a recession in 2013, the budget office said last month.
Once again, a measured approach – always difficult in this era of deep partisanship in Washington – appears to be the best route.
“The explosive path of federal debt under the alternative fiscal scenario—which maintains what might be deemed current policies—underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course,” the report said. “Policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.”
The nation’s debt load as skyrocketed due to a range of factors. Higher spending and lower taxes during the George W. Bush administration led to a doubling of the nation’s debt. Under President Obama, all debt spiked to $15.4 trillion during the recession as revenue plummeted and the federal government spent heavily to boost the economy.
The public portion of the debt load is expected rise to roughly 70% of the nation’s gross domestic output by the end of the fiscal year, on Sept. 30. (The public debt does not include transfers among accounts and is lower than total debt load, which is already about the size of the nation’s GDP.)
If Washington does nothing, current policies already set to take effect by the end of the year would begin to bend the debt curve downward – as low tax rates put in place during the Bush administration are set to expire, boosting revenue, and spending cuts approved by Congress are scheduled to begin in early January, reducing expenditures.
However, that sharp jolt would curtail GDP, slowing growth to just 0.5% for the 2013 calendar year, and likely throw the country into another recession.
Keeping those policies in place are politically toxic this election year, and likely to be undone amid a heated debate in Congress and on the presidential campaign trail.
Obama and his Democratic allies on Capitol Hill are pushing to hike tax rates for those earning above $1 million a year. Republicans, including GOP presidential front-runner Mitt Romney, want to keep tax rates low, but cut domestic programs, sparing the Pentagon.
At the same time, failing to raise revenue, cut spending or some combination of the both poses severe long-term consequences, the CBO warned, slashing GDP, increasing interest rates and borrowing and constraining lawmakers’ ability to respond to a fiscal crisis.