The CCP virus outbreak and federal relief efforts to counteract its economic impact will cloud the long-term fiscal outlook for decades to come, the Congressional Budget Office (CBO) said on Monday, releasing new forecasts that show federal government debt will likely surge to 104 percent in 2021 and in 2050 will be nearly twice America’s economic output.
In its long-term budget outlook, the CBO said that, by the end of 2020, the federal debt held by the public is projected to amount to to 98 percent of gross domestic product (GDP), up from 79 percent in 2019. As federal spending continues to rise, the debt is forecast to reach 104 percent of GDP in 2021 and, by 2023, is projected to exceed the record debt-to-GDP level set at the end of World War II.
In the fiscal year 1946, federal debt as a share of GDP reached 106.1 percent, with the CBO projecting that in 2023, that figure will rise to 107 percent, hitting a new all-time high. Further, the CBO projects that federal debt will continue to rise to 195 percent of GDP by 2050.
CBO Director Phillip Swagel warned that the long-term fiscal path is unsustainable, putting long-term confidence in the dollar at risk.
“There is no set tipping point at which a fiscal crisis becomes likely or imminent, nor is there an identifiable point at which interest costs as a percentage of GDP become unsustainable,” Swagel said in a statement. “But as the debt grows, the risks become greater.”
“High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities,” CBO noted in its report.
The CBO report said that even after the impacts of the pandemic fade, deficits in coming decades will likely be large by historical standards.
“In CBO’s projections, deficits increase from 5 percent of gross domestic product (GDP) in 2030 to 13 percent by 2050—larger in every year than the average deficit of 3 percent of GDP over the past 50 years,” the agency said in its report.
Earlier this month, the CBO reported that short-term deficit levels would hit historic highs, driven by the federal response to counteract the COVID-19 recession. The agency projected that the federal deficit for the current fiscal year will be $3.3 trillion, more than triple the shortfall recorded in fiscal year 2019.
Following the earlier CBO report, the White House said it expects that, by early next year, there will be a drop in both the deficit and the debt-to-GDP ratio as the economy recovers.
Joe LaVorgna, chief economist of the National Economic Council, told Just The News last week that the ratio of federal debt to the country’s GDP will fall as the economy recovers.
“In terms of the overall debt-to-GDP, that’s risen because deficits have risen. If the economy continues to recover—and again, a large portion of this deterioration in the deficit is the result of this pandemic contraction, so as we move away from that and return to normalcy and the economy by early next year recovers possibly—or I should say maybe likely—all of the pandemic related contraction, those deficits are not going to look anywhere near the size they are, and as that happens, your debt-to-GDP also won’t look as bad.” LaVorgna said.
So far this year, around $3.3 trillion in emergency aid to fight the economic fallout from outbreak has been enacted into law, causing a surge in this year’s already large deficit and federal debt. If the full amount budgeted is realized, this will bring the budget deficit to 16 percent of GDP, the highest level since World War II.
Reuters contributed to this report.