UPDATED 4:09 p.m. ET -- The Congressional Budget Office projected Tuesday that the national debt will continue to grow over the next ten years even as the economy recovers, the unemployment rate falls, and tax revenues increase.
The report said, "At an estimated $845 billion, the 2013 imbalance would be the first deficit in five years below $1 trillion" and would be only half as large as the deficit was in 2009, relative to the size of the economy. But that improvement will be merely temporary: in the next several years, an aging population will drive entitlement spending higher at the very same time that rising interest rates increase the government’s debt-service costs, the CBO warned.
In its annual Budget and Economic Outlook, the CBO said debt held by the public will be bigger by 2023 than in any year since 1951 and will be at 77 percent of gross domestic product (GDP) by 2023, far above the 40-year average of 39 percent of GDP.
As a result, the CBO report said, the federal government’s interest costs “will be very high” and will be rising. Interest costs will more than double by the end of the ten-year forecasting period and will be at their highest share of GDP in the past five decades.
CBO director Douglas Elmendorf emphasized to reporters Tuesday that in the past several years, the federal government has benefited from “an extraordinarily long period of extraordinarily low interest rates.”
Elmendorf also stressed that the pressures on the federal budget continue to be driven by the cost of the entitlement programs for older Americans.
Even though the rate of increase in health care spending – including Medicare spending -- has slowed in the past few years, “we still see substantial growth in federal health care spending” over the next ten years and beyond, Elmendorf said.
He noted that in the next ten years the number of people eligible for Social Security retirement benefits will jump by 40 percent. Most of those people will be eligible for Medicare benefits as well.
“We are confronting now in our country changes of a sort we have not had to make in the past,” he said. If one looks at the 20 years before the 2007-2008 financial crisis, he said, “we had rising spending on Social Security and on the major health care programs that was offset as a share of GDP (gross domestic product) by a decline in defense spending.”
But “that’s not a strategy that can be repeated at that magnitude over the next 40 years, because defense spending has come way down as a share of GDP and because the demographic pressures” that are driving up Medicare, Medicaid and Social Security outlays “are so intense,” Elmendorf said.
“We have a large budget imbalance, we have large projected deficits, a debt that will remain at a historically high share of GDP and will be rising at the end of the coming decade. What that implies is that small changes in budget policy will not be sufficient to put the budget on a sustainable path,” he warned.
The CBO chief said a $4 trillion reduction in cumulative deficits over ten years would result in a balanced budget by the end of the ten-year period but to get that deficit reduction entirely from spending would require a two-thirds cut in all non-defense discretionary spending.
“The gap between spending and revenues is very large, and that means that changes you would need to eliminate that gap will be large relative to either outlays or taxes. It would even require large changes even if one split the impact between spending and taxes,” Elmendorf noted.
The CBO’s ten-year forecast assumes that the automatic spending cuts, or sequester, required by Congress and President Obama in the 2011 Budget Control Act, will remain in place.
But if Obama and Congress cancel the sequester’s spending cuts, the CBO said about $1.2 trillion more would be added to cumulative budget deficits over the next ten years.
The Budget Control Act’s spending cuts, which are scheduled to begin on March 1, will reduce defense outlays by about 8 percent and non-defense discretionary outlays by about 5 percent in the current fiscal year, the CBO report said.
On Tuesday Obama called on Congress to pass "a smaller package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester for a few more months" while it comes up with a longer-term alternative.
If the Budget Control Act’s spending cuts are left in place, projected federal spending in the CBO’s forecast will average 22.1 percent of Gross Domestic Product over the period from 2014 to 2023, which is CBO's ten-year forecasting window.
That figure is less than the spending level in 2012, but it is high by the standards of the past 30 years, during which federal spending has averaged 21 percent of GDP.
The CBO estimates that tax revenues will increase by about $260 billion, or 11 percent, in the current fiscal year. About half of that increase in revenues is due to the Social Security payroll tax reverting to its normal 6.2 percent rate at the start of this year, after being cut to 4.2 percent as an economic stimulus measure in 2011 and 2012.
Elmendorf said the economy is growing stronger. “The good news is that the effects of the housing and financial crisis appear to be gradually waning,” he told reporters, predicting “a virtuous cycle of faster growth in employment, income, consumer spending and business over the next few years.”
But the tax increases enacted at the end of last year and spending curbs in the Budget Control Act will depress economic growth this year.
The CBO said the economy will grow at a real, inflation-adjusted rate of 1.4 percent this year and 3.4 percent next year, with the unemployment rate remaining high through 2014.
If the CBO forecast is correct, 2014 will be the sixth consecutive year with unemployment exceeding 7.5 percent, “the longest such period in the past 70 years.”
But the CBO forecast assumes that the jobless rate will fall to 5.5 percent by 2018. It was last at that level in the summer of 2008.
Each January, the CBO issues its budget projections for the next 10 years. The forecast is intended to guide Congress as it designs fiscal policy. The CBO projections assume that current law remains in place and that no new tax increases, spending cuts or fundamental restructuring of federal programs such as Medicare are enacted.