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The federal government is staring at a disastrous fiscal picture with debt approaching 200 percent of GDP within two decades if Congress doesn’t change course on spending and taxes, according to the latest analysis by the Congressional Budget Office released Tuesday.
CBO said it’s the worst picture since a brief period during World War II when spending ballooned to fund the military campaign.
“In the past few years, the federal government has been recording the largest budget deficits since 1945, both in dollar terms and as a share of the economy. Consequently, the amount of federal debt held by the public has surged,” CBO said in a long-term budget outlook that paints a shockingly dark picture of government finances.
CBO’s analysts said the downturn and Congress’s response to it have been devastating for the government. Federal debt as a percentage of Gross Domestic Product — a standard measure of a government’s debt burden — stood at 40 percent at the end of 2008. But it will top 70 percent by the end of this year, and is only headed higher unless Congress changes. It could double by the middle of the next decade and will have topped 200 percent of GDP — twice the size of the projected U.S. economy — by 2037.
At that level, fiscal catastrophes are more likely, and the government’s ability to respond becomes far more constrained.
Ironically CBO said the deep deficits and debt don’t have to happen. If Congress would step out of the way and allow current law — including ever-deeper spending cuts and potentially devastating tax increases — to go into effect, debt would begin to shrink almost immediately as a percentage of the economy, as measured by Gross Domestic Product.
But President Obama and lawmakers on Capitol Hill have been reluctant to let the law take its course. Instead, the GOP has fought to permanently extend lower tax rates, and Democrats have defended existing spending and in many instances called for new spending.
That’s left the country bumping along with deficits of $1 trillion or more each of the last three years. Yet with the economy still weak, lawmakers remain paralyzed as they try to figure out how to act over the long term without harming the economy now.
CBO said that may not be possible.
“On the one hand, cutting spending or increasing taxes slowly would lead to a greater accumulation of government debt and might raise doubts about whether longer-term deficit reduction would ultimately take effect,” CBO said. “On the other hand, abruptly implementing spending cuts or tax increases would give families, businesses, and state and local governments little time to plan and adjust, and would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations.”
So, for those of you thinking we’ll be alright in a few months or a few years… sadly you couldn’t be more wrong.