The recent decline in federal deficits should not create a false sense that the national debt is no longer a clear and present threat. While this improvement may be encouraging, it represents only a temporary respite from the government’s growing fiscal imbalances. Congressional Budget Office (CBO) estimates show deficits growing again two years from now, returning to trillion-dollar levels within a decade, and worsening from there.
In short, the United States’ fiscal outlook has not changed. Americans will soon have to deal with the consequences of being a highly indebted nation. While economists can’t predict exactly when or how a debt crisis will manifest itself in the United States, such a crisis is inevitable if current spending trends continue. The longer policymakers delay the needed course correction, the more likely they will be forced to rush through ill-conceived policies in the face of a crisis.
DEFICITS AREN’T GOING AWAY
The improvement in the fiscal situation over the past few years was driven largely by the extraordinarily high deficit levels between 2009 and 2013. The government’s deficits surged from about $459 billion in fiscal year (FY) 2008 to $1.4 trillion (9.8 percent of gross domestic product, or GDP) the following year, then remained above the trillion-dollar mark until 2013. They are now projected to fall to $492 billion in FY 2014 (2.8 percent of GDP) and then to decrease further to $469 billion in FY 2015 (2.6 per- cent of GDP).1
In the face of these large deficits, debt held by the public as a share of GDP has continued to grow and is projected to remain near three-fourths of total economic output in the near-term—levels higher than at any time since 1948—and to exceed the size of the entire economy by 2039.2 Under different assumptions—with looser spending restraints and economic feedback of high government debt factored in—the CBO estimates that the debt-to-GDP ratio could reach 183 percent of GDP by 2039.3
Deficits and debt are merely symptoms; the disease is overspending, and only by curing it can Washington correct the phenomenal fiscal imbalance the government faces now and in the future. No level of taxes can close this gap over the long term,4 and higher taxes would exacerbate the deficit and debt problem by acting as a drag on growth.5
The deficits caused by overspending are already impeding growth. For the past several years, following substantial fiscal and monetary stimulus measures, forecasters have predicted a return to normal rates of GDP growth, but these conditions have not materialized.6 Further, recent job gains mask nagging underlying problems in the employment market, including a historically low labor force participation rate7 and a chronically high number of long-term unemployed.8