Deficit Reduction Necessary to Confront the Nation’s Debt

On August 21, 2018, the Congressional Budget Office (CBO) released a report, The Deficit Reductions Necessary to Meet Various Targets for Federal Debt. CBO’s analysis sheds new light on the magnitude of actions necessary to confront the nation’s rising debt and put the country on a sustainable fiscal path.

State of the Debt Without Action

Publicly held debt has averaged 41 percent of gross domestic product (GDP) over the last 50 years. Today, however, it has exploded to 78 percent of GDP, and CBO projects that without congressional action, its rapid growth will continue – reaching a massive 152 percent of GDP by 2048. This is unsustainable and could eventually lead to a sovereign debt crisis.

Results of Deficit Reduction Scenarios

CBO’s recent report analyzes deficit reduction scenarios necessary to achieve debt targets by 2033, 2038, 2043, and 2048. Each scenario illustrates the annual deficit reduction required to lower debt back to the 50-year average of 41 percent of GDP, maintain the current level of 78 percent of GDP, or reach 100 percent of GDP instead of the higher projected level of 152 percent. The deficit reduction required in terms of GDP for each scenario is illustrated by the chart.

To put this in perspective using the scenario of hitting the targets in 15 years (by 2033), the primary deficit would need to be reduced by 3.9 percent of GDP each year – equating to $830 billion in fiscal year 2019 and growing with GDP annually throughout the 15-year window –  to return public debt to the 50-year average of 41 percent of GDP. To maintain the current level of debt as a percent of GDP, the deficit would need to be reduced by 1.6 percent of GDP every year – or $340 billion in fiscal year 2019 and increasing in each subsequent window-year. And to slow down growth to reach 100 percent of GDP rather than the projected level of 152 percent without action, the deficit would need to be reduced each year by 0.3 percent of GDP – a reduction of $60 billion in fiscal year 2019.

Taking Action

CBO’s recent report illustrates the depth of the nation’s fiscal challenges and the urgent need to change the trend of rising deficits and growing debt. The House Budget Committee already took a significant step in the right direction by passing the Budget for a Brighter American Future, which balances in nine years and calls for $8.1 trillion in deficit reduction. In addition, work in the Joint Select Committee on Budget and Appropriations Process Reform is currently underway to improve the process by which Congress addresses the nation’s fiscal challenges, including the long-term debt.

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