Wednesday, 22 of November of 2017

Economics. Explained.  

Debt Outstanding

February 8, 2017

Debt Outstanding as Pct GDP

The Congressional Budget Office recently released its  budget deficit projections for the decade from 2017-2027.  For the current fiscal year it projects a budget deficit of $559 billion.   A deficit of that magnitude will push debt held by the public to 77.3% of GDP.  For the first seven years of the previous decade debt held by the public averaged about 35% of GDP.  But the depth of the recession changed all that and debt as a percentage of GDP has exploded.

The budget outlook shows roughly comparable deficits for the next couple of years, but they begin to rise again by 2020.  As a result, by 2027 the debt to GDP ratio is expected to climb to 89% of GDP.  Most economists would agree that a debt to GDP ratio of 50% would be sustainable, but if it should climb to 90% of GDP it could easily become a problem.  At the 90% mark investors would be less willing to buy that country’s debt, interest rates would rise, the interest expense for the Treasury would increase, and budget deficits would widen.  At 89% the debt ratio gets close to the 90% danger level during the next 10 years.

However, the real deficit and debt problems begin immediately after the CBO’s 10-year forecast horizon.  This is because the baby boomers continue to retire.  They will start to receive Social Security payments and become eligible for Medicare.  If one looks ahead 30 years rather than 10, the debt to GDP ratio climbs significantly higher.  Indeed, by 2047 the CBO estimates that the debt to GDP ratio will be 144% rather than the 89% that they expect at the end of 10 years.  That is way beyond the so-called 90% danger level.

Debt Outstanding as Pct GDP -- Long

To prevent this from occurring Congress and the President need to come to an agreement to shrink the deficit so that debt outstanding relative to GDP shrinks to a manageable level of 50% or less over the course of the next 30 years.  It is do-able, but the question is whether our policy makers have the will to do what is necessary.

None of these charts reflect policy changes that the Trump Administration would like to make.  We know that he wants to cut both individual and corporate income tax rates which, by themselves, would boost the budget deficit (and debt outstanding).  But he expects GDP growth to pick up to 4.0% within a few years which would (he hopes) generate enough tax receipts to offset the tax cut.  On the spending side he has said that he intends to increase defense spending.  But that is only about 17% of total government spending.  We do not know what the rest of the spending side will look like.  When his proposals are clearer, the CBO will score those policy changes.  We simply do not know enough to be able to come up with any meaningful estimate at this time.

Stephen Slifer

NumberNomics

Charleston, SC


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