Wednesday, June 30, 2010

Debt Without End?

The most recent report on the federal debt outlook from the Congressional Budget Office doesn't paint a pretty picture. From the CBO's blog (who knew?):

Recently, the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II. As a result of those deficits, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (as measured by gross domestic product, or GDP), a little above the 40-year average of 36 percent. Since then, large budget deficits have caused debt held by the public to shoot upward; CBO projects that federal debt will reach 62 percent of GDP by the end of this year—the highest percentage since shortly after World War II.

But that's only the start. The Economist has some analysis on likely scenarios and publishes this chart:

The CBO blog has an explanation for the shape of these curves:

The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. In this scenario, CBO assumed that Medicare’s payment rates for physicians would gradually increase (which would not happen under current law) and that several policies enacted in the recent health care legislation that would restrain growth in health care spending would not continue in effect after 2020.
Note how the increase in spending in the long term is due to medical spending by the federal government. This is the reason that Obamacare is so pernicious. For all the reasons that we have detailed previously (straitjacket on free enterprise, reduced competition, increased demand due to subsidies) spending on health care by the federal government will inevitably increase.

Further, there are other reasons to be believe that tax revenues will be flat in the long run, as shown in the chart above, regardless of tax law changes. I have previously commented on Hauser's law, which is an empirical observation that federal tax receipts will never rise above 20%. Recently found the graph that shows this:

The math of our situation is unavoidable. Under the current tax system, we will not raise significantly more revenue, but the cost of government will inevitably rise. To answer the title question, of course this debt will end, because it is unsustainable. If the Greeks can figure this out, so can we, the sooner, the better.

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