The Congressional Budget Office (CBO) released its annual projection of long-term U.S. debt on Tuesday, but the report may have failed to take an important kind of debt into account, resulting in artificially low projections. One fiscally-minded nonprofit group made the necessary corrections, and found that America’s debt-to-GDP ratio in 2046 will be nearly as bad as that of Greece today.
“In 2046, CBO said the debt-to-GDP ratio will be 141 percent, but with our calculations, it will actually be 174 percent, nearly identical to the debt-to-GDP ratio that we see in Greece,” Andy Koenig, senior policy advisor at Freedom Partners, told reporters on a call Tuesday. Koenig argued that the CBO failed to account for intragovernmental debt, which means that their numbers are a more rosy projection of the future than we should really expect.
But even the CBO presents a dire warning, writing that “federal debt as a share of GDP would reach unprecedented levels if current laws generally remain unchanged. Such high and rising debt would have serious consequences for the nation’s budget and economy.
Koenig pointed out exactly what those “serious consequences” might be. A 174 percent debt-to-GDP ratio “means high unemployment, inflation, tax increases, automatic cuts to mandatory government programs, more people in poverty, and less opportunity.” Ouch.
How did CBO underestimate the debt? It used the wrong number, Koenig argued. There are a few different ways to calculate the national debt:
The term “public debt” refers to the amount of money the federal government owes the “public,” meaning any investors outside the federal government itself. That number is just under $14 trillion.
“Gross debt” also includes money the government owes itself, and this is the number with which Americans are most familiar — $19 trillion, 104 percent of GDP. This debt includes intragovernmental debt, which is the money government owes itself for certain programs. Social Security and Medicare, for instance, operate from trust funds which are likely to be insolvent in the next 15 years.
In its long-term projections of debt, the CBO did not include intragovernmental debt. Instead of projecting gross debt into the future, it focused on public debt. That’s why their numbers likely fall short of telling the whole story.
Next Page: What happens when you include intragovernmental debt?
When the trust funds run out, government will have to go into debt to finance Social Security and Medicare, and there will likely be a big spike in public debt as the intragovernmental debt declines.
“You would expect that there would at some point be a huge increase in public debt when the trust fund ran out,” Koenig explained on the call. “We don’t see that jump” in their calculations, he said, so Freedom Partners decided to run the numbers themselves. “We just made the assumption that when the trust fund runs out, they will borrow the debt to meet the obligations that they have currently outlined in terms of entitlement spending.”
What they found was terrifying. “Based on more accurate estimating techniques, we’ve determined that the gross federal debt will nearly double by 2030 (from $19.3 trillion to $37.8 trillion), reaching 116 percent of GDP. This projection is 23.5 percent higher than CBO predicts,” according to the Freedom Partners report.
“History has shown that governments can only withstand so much debt before wide-scale economic decline sets in,” the report added. It cited Argentina and Greece as harbingers of what such crippling debt looks like and the impacts it will likely have on forcing higher unemployment, tax increases, inflation, cuts to government programs, poverty, and decreasing opportunity.
We hear horror stories from Greece and especially from Venezuela about the repercussions of ballooning debt, but never think that such tragedies –like an entire country running out of toilet paper! — could ever happen to us. This report suggests that we need to consider those stories a warning, and think seriously about reforming our government, lest America drown in its own debt crisis.