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UPDATE 1-Unchanged tax, health policies to explode US debt-CBO
June 5, 2012 / 9:42 PM / 5 years ago

UPDATE 1-Unchanged tax, health policies to explode US debt-CBO

* U.S. debt could reach 200 percent of GDP in 25 years-CBO

* Letting Bush tax cuts die reduces U.S. long-term debt load

* CBO report bolsters Democratic, Republican arguments (Adds details on Japan, quotes from Romney campaign, lawmaker)

By David Lawder

WASHINGTON, June 5 (Reuters) - U.S. public debt would balloon to twice the size of the nation’s economy in 25 years if current tax and spending policies are extended, Congress’ budget referee said on Tuesday, delivering fresh fodder for a year-end budget brawl.

The Congressional Budget Office said in a report that if tax cuts enacted under George W. Bush are allowed to expire as scheduled on Dec. 31, along with some other tax and spending policies, U.S. public debt would shrink significantly, falling to 53 percent of gross domestic product by 2037 from 73 percent this year.

By comparison, Greece, debilitated by a crushing debt crisis that may force it to leave the euro, is forecast to have a debt load topping 160 percent of its GDP this year.

Japan currently has a debt-to-GDP ratio of just over 200 percent and has been stuck in an economic quagmire for well over a decade that has diminished its influence.

While the CBO report raised some serious warning signs for the U.S. economy over the long term, it did little to narrow the differences between Democrats and Republicans even as a year-end deadline for the tax cuts, automatic spending cuts, and other fiscal decisions draws nearer.

President Barack Obama and other Democrats have argued that leaving in place the across-the-board tax cuts initiated by Bush, as Republicans have proposed, is fiscally irresponsible and new revenues are needed by restoring higher tax rates on the wealthy.

Republicans, including presidential candidate Mitt Romney, say that tax rates can be lowered if Congress makes significant cuts in entitlement programs such as the Medicare and Medicaid healthcare programs for the elderly and poor.

“Today’s CBO report confirms that President Obama has placed us on a path to fiscal ruin,” said Lanhee Chen, the Romney campaign’s policy director. “Instead of tackling entitlement reform, (Obama) has made clear that he has no plan for addressing the challenge.”

Representative Chris Van Hollen, the top Democrat on the House Budget Committee, said the biggest obstacle to getting U.S. debt under control was Republicans’ refusal to consider any tax increases.

“Republicans continue to push for this austerity-only, austerity-now approach,” Van Hollen said. “We’ve proposed a combination of spending cuts and revenues generated by cutting a lot of tax loopholes. It’s hard to move forward when you have one party demanding that they get things 100 percent their way.”

AN AGING AMERICA

The CBO report finds, as it has in past years, that the biggest source of growth in federal spending will come from Medicare and Medicaid expansion. By 2037, if no changes are enacted, federal healthcare spending would double to around 10 percent of gross domestic product compared to around 5 percent in 2010, it said.

“The aging of the U.S. population and the rising costs for healthcare mean that the combination of budget policies that worked in the past cannot be maintained in the future,” the CBO said in the report.

But sticking to its non-partisan mandate, the CBO steered clear of favoring one party’s solutions over the other‘s.

“To keep deficits and debt from climbing to unsustainable levels, as they will if the current set of policies is continued, policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two,” CBO said.

U.S. economic growth over the long term also would take a huge hit if the debt were to rise to crushing levels, CBO said. If current tax and spending policies were left in place, pushing debt drastically higher, U.S. economic growth would be 4 percent lower by 2027 and 13 percent lower by 2037, it said.

In addition to the economic burden, the debt load could push up interest rates on benchmark 10-year Treasury debt by as much as 3.5 percentage points, adding further to the massive costs of servicing the debt, CBO said.

This would leave little room for policymakers to use new spending to deal with future economic downturns and in turn would make the United States more susceptible to financial crises, the CBO said.

Reporting By David Lawder; Editing by Kenneth Barry

Our Standards:The Thomson Reuters Trust Principles.
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