Looming Deadlines a Moment to Attack Debt
If federal legislators do not act, the government will reach record levels of debt equal to 100 percent of the country’s annual output, or GDP, by 2038, according to a Congressional Budget Office report.
The agency is warning that despite the fact that the current deficit, which represents the shortfall between money the government collects and what it spends, is going down for the next few years, the trend will reverse leading to unsustainable debt if the government does not act.
Policies enacted in response to a weak economy, and other reduced spending due to congressional action since 2008, have led to reduced deficits.
Congress and the Obama administration are facing an Oct. 1 deadline to agree on spending levels for fiscal year 2014. Not agreeing would lead to a government shutdown.
Another deadline looms in mid-October. Congress must agree to raise the debt ceiling by then in order to avoid an unprecedented default on the country’s debt obligations.
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Neither of the two deadlines requires the president and Congress to take decisive action to reduce the deficit. But they do present opportunities to address the larger situation.
After reaching a diplomatic solution for the Syrian missile strikes crisis, Obama turned his attention back squarely on the debt crisis at home, and has been speaking regularly on the topic.
On Monday, during a speech commemorating the country’s fragile recovery since the economic collapse of 2008, the president blasted Republicans for taking uncompromising stands ahead of looming budget deadlines.
A group of House Republicans is saying that they will not support any budget agreement unless they are able to repeal or delay the new Affordable Care Act.
Deficits will continue to decrease for the next few years, but they will start going up, and the trajectory could be difficult to stop, according to the Congressional Budget Office (CBO), an independent agency that is the official monitor of government spending.
When doing its calculation, CBO projects into the future taking into account what can be predicted under current law. When the law changes, the CBO updates its baseline projections.
The largest drivers of the deficit and the debt are Social Security and health care spending. Until now, stopgap measures such as sequestration, which reduced across-the-board spending on discretionary programs and defense, left the major government entitlement programs untouched.
The CBO points out that expected debt increases have a lot to do with Obama’s signature health care overhaul, which will drive a “sharp increase” in the number of people receiving government benefits.
The spending increases are due to an expansion of subsidies for people who purchase insurance through health exchanges starting in October, and an increase in people receiving Medicaid under the new law.
In addition, the next decade will see the aging of the baby boomer generation (people born between 1946 and 1964), resulting in an increase in the number of people receiving benefits by over a third.
Finally, with interest rates currently near zero, rates can only go up, leading to increasing interest costs, another major expense for the government, which currently has $16.7 trillion in debt.
Obama and Congress are facing both an opportunity and a conundrum. Unable to agree for years on how to tackle the rising debt, Obama has resorted to agreeing to stopgap measures that fail to address the major contributors to the debt problem.
The past scenario has been that the president has agreed to reduce spending in exchange for Republican support for raising the debt ceiling, so that the government can keep paying its bills. A repeat of some version of this scenario is now likely, but if CBO estimates are accurate, time is pressing.
Federal debt held by the public is now 73 percent of GDP, a figure higher than at any point in history, except a brief period around World War II.