The tax cuts championed by President Trump are helping push the nation toward an unprecedented level of debt, heightening the risk of another financial crisis, according to the nonpartisan Congressional Budget Office.
The budget office’s annual look at the government’s long-term financial outlook paints a grim picture, projecting soaring deficits in the coming years, with debt ultimately peaking at more than 152% of the nation’s gross domestic product.
“The prospect of large and growing debt poses substantial risks for the nation and presents policy makers with significant challenges,” Keith Hall, director of the budget office, said in a statement.
The federal debt currently stands at about $15 trillion, or 78% of the size of U.S. economy. If current trends continue, it will roughly equal the size of the economy within a decade, the budget office said. The last time the debt burden hit that level was just after World War II.
The biggest problem in the coming decade stems from last year’s tax cut. It is estimated to increase the deficit by more than $2.3 trillion over the decade.
And that’s under an optimistic scenario. Under the tax law, individual income tax rates are slated to increase sharply at the end of the decade, while corporate taxes remain low. If Congress allows that individual tax hike to take effect, the tax cut’s long-term impact on the debt will begin to fade after the next 10 years.
But if Congress balks at that big tax increase — many members of Congress already have said they want to make the individual cuts permanent — the red ink would be even worse than projected, the budget office said.
The budget office did not offer a specific projection of the more pessimistic scenario, but the bipartisan Committee for a Responsible Federal Budget, an advocacy group, crunched the numbers and found that if the individual cuts were kept in place, federal debt would be twice the size of the nation’s economy, and annual deficits would exceed 13% of the GDP over the next 30 years.
The impact of the tax cut comes on top of a preexisting problem — the spiraling price of providing subsidized healthcare and Social Security for the huge baby boom generation as it moves into retirement, the budget office said.
Most of the rest of government spending is projected to decline, relative to the size of the economy, the report said. The one big exception is interest payments, which will rise as the debt increases.
Debt at the level the U.S. is currently piling up could have serious consequences, the budget office warns. The high level of red ink increases the likelihood of a fiscal crisis, threatens to reduce the income of average Americans, and gives lawmakers limited options to deal with big events that require a government response, such as another deep recession.
Rising debt also threatens to weaken the global power of the United States as it increasingly depends on foreign investors to lend money to the Treasury, the report noted.
What makes the rapidly increasing debt particularly striking is that it’s happening at a time when the U.S. is at peace and the economy is booming. The previous high point for the debt came when the nation was deep in the red from the effort to win the world war and the public works projects implemented in response to the Depression.
More recently, the U.S. plunged back into a high debt to combat the Great Recession, when Congress passed major spending increases to pull the nation out of it. But Washington not only failed to wipe out the red ink when the economy rebounded, after a few years of progress in President Obama’s second term, the government under Trump has reversed course, moving toward even higher debt levels.
Many economists feel that borrowing money to cope with an emergency of that sort makes sense — ultimately, the country emerges better off. But a big increase in the debt in the absence of any such emergency is more problematic and illustrates how the country’s intractable deadlock over taxes and government spending has led to a result — rising debt — that both parties claim to oppose.
For the next decade, the national debt is projected to surge, bringing the nation into uncharted territory unless the government adopts far-reaching policy shifts that could include deep cuts in spending on entitlement programs or significant tax increases.
The report lays out precisely what it would cost to keep the long-term debt from soaring.
To bring the red ink down to the historical average level, taxes would need to increase 17% -- $2,000 per household -- or government spending would need to be cut by 15%. Over the last 50 years, federal debt has average about 41% of the gross domestic product.
Just keeping the federal debt at its current, historically high level would require increasing taxes by 11% — $1,300 per household — or cutting spending by 10%.
The heavy level of debt is already taking a toll on taxpayers. The report projects that government borrowing costs are on track to exceed the amount the government spends each year on Social Security.
One of the biggest problems posed by rising debt levels is the way it handcuffs the government’s ability to respond to emergencies, the report notes.
Lawmakers had flexibility to respond to the Great Recession because the federal debt at that time was below 40% of the GDP — nearly half what it is now.
“If another recession or fiscal crisis occurred and federal debt was at its current level or higher, the government might have a more difficult time implementing similar costly actions in response,” the report warned.