WASHINGTON – The amount of federal debt held by the public is projected later this year to surpass 70 percent of the nation’s annual economic output, the nonpartisan Congressional Budget Office said Tuesday in a report that spotlighted the stark choices policymakers face on taxation and government spending.
Coming out of the so-called Great Recession, the United States has recorded the largest budget deficits – in dollar terms and as a percent of the economy – since World War II, the CBO said. Federal debt held by the public in 2008 stood at about 40 percent of the gross domestic product, the sum of all goods and services sold in the U.S. economy in a year. It’s approaching twice that today, projected at 73 percent or higher, and the CBO suggested that both parties are to blame.
“The sharp rise in debt stems partly from lower tax revenues and higher federal spending caused by the severe economic downturn and from policies enacted during the past few years,” the CBO said in its 2012 Long-Term Budget Outlook. “However, the growing debt also reflects an imbalance between spending and revenues that predated the recession.”
The projections are a reminder about the difficult choices that must be made to set the nation on a sounder fiscal footing for the future. Later this year, Congress must decide whether to extend tax cuts that are set to expire and whether to let steep, automatic spending reductions take effect.
“The numbers are a little different than they were before, but it’s the same story,” said Roberton Williams, a former CBO economist who’s a senior researcher at the Tax Policy Center, jointly run by the centrist Urban Institute and the center-left Brookings Institution. “The most important message is, putting it simply, you can’t have your cake and eat it too. You can’t have low taxes and high spending.”
As grim as the report was, the calculation, some economists think, understates the true scope of our debt problem. Debt held by the public, which stood Tuesday at $10.9 trillion, excludes money borrowed from Social Security and other government accounts. When this $4.7 trillion, called intra-governmental holdings, is added into the mix, the total debt is in the ballpark of $15.7 trillion.
That’s about equal to the nation’s entire annual output. That’s important because new academic research suggests that nations with debt levels of 90 percent or more of their GDP grow more slowly – at rates similar to the sluggish U.S. recovery – and take longer to recover from financial crises.
Greece, the nation that’s at the heart of European debt woes, had a ratio of government debt to GDP in excess of 142 percent before its crisis and is now above 160 percent. Italy’s ratio was around 119 percent last year, before the debt crisis snowballed.
The United States prints the dollar, the world’s reserve currency, and as an economy it’s much larger, more robust and more entrepreneurial than most countries with which it’s compared. Still, that doesn’t preclude the potential for severe future problems if the debt trajectory isn’t fixed and investors lose confidence.