CBO: ‘Large Debt Increases Risk of Fiscal Crisis, During Which … Government Would be Unable to Borrow…’
(CNSNews.com) - In its latest budget projections, released this month, the Congressional Budget Office warns that interest payments on the federal government's debt will more than double in the coming decade, that an expected increase in tax revenues to higher than average historical levels will not prevent the government’s persisting annual deficits from rising at the end of that period, and that the larger projected government debt will cause smaller American wages.
The CBO also points out--in clinical terms--that a large federal debt could lead to a fiscal crisis where investors no longer want to buy the securities the U.S. Treasury sells to finance the debt.
“Such high and rising debt later in the coming decade would have serious negative consequences,” says the CBO report.
“When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially,” says the report.
“Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced,” says CBO. “In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges. Finally, a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.”
The CBO also said that under current laws both federal spending and federal tax revenues as share of Gross Domestic Product are expected to be higher in the coming decade than has been the historical norm for the United States.
“During the next 10 years, both revenues and outlays are projected to be above their 40-year averages as a percentage of GDP,” says CBO.
Despite historically high tax revenues, the federal government will continue to spend more than it brings in and will increase the debt every year during the next decade. The CBO envisions that the bigger debt that will ensue will require federal interest payments that more than double to an almost unprecedented share of the nation’s wealth.
“The increase in debt, along with an anticipated substantial rise in interest rates as the economy strengthens, is expected to sharply boost interest payments,” says CBO. “CBO projects that, under current law, the government’s net interest spending will more than double as a share of GDP in the coming decade—from 1.4 percent in 2014 to 3.2 percent in 2023, a percentage that has been exceeded only once in the past 50 years.”
When the Republicans won control of the House of Representatives in the 2010 elections, a law that had been enacted by the previous Democrat-controlled Congress and signed by President Barack Obama on Feb. 12, 2010 limited the federal debt to $14.294 trillion. Republican House Speaker John Boehner then cut a deal with President Obama for legislation that Obama signed on Aug. 2, 2011 that increased the limit on the federal debt to $16.394 trillion.
On Feb. 4 of this year, President Obama signed legislation that had been approved by the Republican-controlled House that completely suspended the debt limit through May 18—which was last Saturday.
On Friday, Treasury Secretary Jack Lew sent a letter to House Speaker John Boehner and other congressional leaders informing them that since the law suspended that had suspended the debt limit was expiring, and the administration intended to continue with its planned deficit spending, he would begin using “extraordinary measures” to continue net federal borrowing. These measures included changing the way the Treasury accounted for the money it owed to federal government employee and postal employee retirement plans so that that money did not count as debt.
Lew told the congressional leaders he believed these “extraordinary measures” would allow the government to continue net borrowing “until after Labor Day.”
At that point the government would have essentially four options: decrease spending, increase taxes, increase the legal limit on the federal debt, or some combination of the three.
On behalf of the administration, Lew offered Congress only one of these options: increase the legal limit on the debt.
“We will not negotiate over the debt limit,” Lew said.
According to the Treasury, the federal government’s debt was $16,737,282,992,090.73 as of the close of business on Monday. That equals approximately $146,266 per each of the 114,430,000 households the Census Bureau now estimates there are in the country.