Why Does the Debt Matter?
Encouragingly, the debt held by the public as a share of the economy (the measure that economists look at) will stabilize over the next few years – albeit at elevated levels - due to a combination of a recovering economy and several deficit reduction measures. After 2018, however, a combination of rising health care costs, an aging population, and insufficent revenues are set to put the debt on an upward path for as far as the eye can see. This is worrisome, as rising debt levels during normal economic times pose serious risks to the United States.
Source: Congressional Budget Office data and CRFB projections.
Specifically, the risks to rising federal debt levels are:
- Slower Economic Growth: During normal economic times, high levels of debt “crowd out” more productive private investment in favor of government bonds. Without strong private investment, economic growth will suffer. As one example, CBO estimates its Alternative Fiscal Scenario (AFS) – which projects debt levels at 140 percent of GDP in 2035 – would reduce projected gross national product by almost one percent in 2023 and eight percent by 2035.
- Higher Interest Rates: In additional to slowing economic growth, higher debt levels will tend to put upward pressure on interest rates. As a result, the cost of mortgages, student loans, and business loans will rise – meaning fewer individuals will be able to take advantage of these loans and those who do will face higher out of pocket costs. In addition, interest payments by the government will rise, crowding out other priorities and further increasing debt in ways that could spiral uncontrollably.
- Loss of Fiscal Flexibility: As debt levels rise, future generations and Congresses will have less capacity to make their own tax and spending decisions. High levels of debt will also limit the ability (or political appetite) of lawmakers to effectively respond to a natural disaster, security threat, economic downturn, or another national need or priority.
- Increased Risk of a Fiscal Crisis: Eventually, federal debt levels could reach heights whereby investors lose confidence in the country’s ability to make good on its debts, leading to a sharp rise in government interest rates. This could in turn spark a painful financial crisis. Although no one knows when or in what form such a crisis would occur, it is clear we cannot increase our borrowing indefinitely.
- Programmatic Insolvency: Even absent broader debt concerns, a number of programs with dedicated revenue sources face their own funding challenges. According to CBO, the highway trust fund will run out of money in 2015, the Social Security disability trust fund in 2017, and the Medicare trust fund in 2024. On a combined basis, the Social Security trust funds will exhaust their assets by 2031, at which point all current and new beneficiaries will face immediate and across-the-board reductions in their annual benefits of more than 20 percent.
It is important to note, however, that there is a different between good deficits and bad deficits. Temporary borrowing by the federal government during an economic downturn or in response to another national crisis can help the economy and allow the government to quickly and effectively respond to urgent needs. However, as explained above, substantial and continued borrowing can have serious consequences.
Why Is It Important for Lawmakers to Act?
Only a clear and sustained downward debt path can reverse the risks associated with rising debt. Through a comprehensive debt plan that reforms Social Security and Medicare, reforms the tax code to raise new revenues and address hundreds of tax loopholes, and replaces the sequester with targeted and permanent reforms, lawmakers can build on recent deficit reduction efforts to put the debt on a downward path as a share of the economy.
In addition, the longer we wait the more difficult the necessary changes will be. Waiting to reform federal programs and the tax code today will just mean larger adjustments tomorrow. And with an aging population and millions of Baby Boomers in or close to retirement, the longer we wait, the larger the burden will be on future generations.
It is time for Congress to get serious about the long-term debt problem, which has largely been ignored even as lawmakers have made progress on addressing short-term borrowing levels. For more information, read our report on the long-term problem.
Where Can I Learn More?
- CRFB. "Our Debt Debt Problems Are Still Far from Solved." May 15, 2013.
- CRFB. "Our Long-Term Debt Problems Are Very Far from Solved." November 20, 2013.
- CRFB Backgound Slides: Our Debt Problems Are Far from Solved.
- CRFB. "Good Deficit, Bad Deficit." April 16, 2009.
- Congressional Budget Office (CBO). "Risks of a Fiscal Crisis." July 27 2010.