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Report: 2011 deficit to hit all-time high — national debt will go to 69% of GDP

Once a year, the Congressional Budget Office releases a report that looks ahead at the federal budget situation over the decade ahead. The latest Budget and Economic Outlook (PDF—190 pages) came out last week, and (not surprisingly) the news isn't exactly encouraging.

Excerpts:

The United States faces a daunting fiscal outlook, both for the next few years and for the long term. The Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion for fiscal year 2011, about $200 billion more than the deficit recorded in 2010....

The accumulating deficits [over the next several years] will significantly boost federal debt held by the public. Over the course of fiscal year 2010, debt held by the public jumped from $7.5 trillion to $9.0 trillion. By the end of 2011, CBO projects, that figure will be $10.4 trillion and, at 69 percent of GDP, the highest level since 1950.

[D]ebt held by the public is projected to continue its upward climb, reaching $18.3 trillion...by the end of 2021. With such a large increase, along with an anticipated rise in interest rates as the economic recovery strengthens, interest payments on the debt are expected to skyrocket. CBO projects that the government's yearly net interest spending will more than triple between 2011 and 2021 (from $225 billion to $792 billion).

Interestingly, the report notes, if it weren't for those skyrocketing interest payments, yearly deficits would shrink significantly over the next several years, with outlays eventually almost matching revenues by 2017. But, of course, interest must be counted.

And there's more:

Beyond the 10-year projection period, further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades.

In particular, spending on the government's major mandatory health care programs — Medicare, Medicaid, CHIP, and health insurance subsidies to be provided through the new insurance exchanges — along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years. If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt....

[A] growing federal debt...would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors' confidence faltered, giving legislators warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. Indeed, because interest rates on Treasury securities are unusually low today, such a crisis does not appear imminent in the United States.

But as other countries' experiences show, investors can lose confidence abruptly and interest rates on government debt can rise sharply and unexpectedly....

[T]here is no way to predict with any confidence whether and when such a crisis might occur and no identifiable tipping point of debt relative to GDP. However, the risk of a crisis probably will increase when investors' growing confidence in the global recovery and the stability of the financial system increases their desire to hold private securities and foreign debt rather than Treasury securities.

A report such as this is, by nature, speculative. Accurate 10-year forecasting is impossible. That said, the overall budgetary trend is indisputably unsound — and the results could be dire.

Let us hope Washington heeds the warning.

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