Realistic Budget Baseline Shows $13 Trillion in Debt over the Next Decade

by Brian M. Riedl
Senior Policy Analyst
Heritage Foundation

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The new Congressional Budget Office (CBO) 10-year budget baseline provides a sobering picture of a federal government that has committed itself to trillions more in spending than taxpayers can afford. Once the baseline is scrubbed of several unrealistic assumptions that Congress demands CBO use, the more realistic baseline shows that massive spending increases are set to keep the budget deficit to $1.4 trillion in 2010 and drive it to $1.9 trillion by 2020.

A Sea of Red Ink 
 
The CBO baseline contains two important messages. First, Washington is accumulating debt at an unsustainable rate. After the debt slowly grew to $5.8 trillion through 2008, the more realistic baseline shows the federal government adding an astonishing $16.3 trillion in new debt between 2009 and 2020–$130,000 per household over those 12 years.

Budget deficits would average $1.3 trillion annually as the debt climbs to 98 percent of the gross domestic product (GDP) by 2020–and continues growing thereafter. This steep rise in debt would eventually become too large for global capital markets to absorb, potentially triggering a financial crisis, interest rate spike, and gigantic tax increases…

…Thus, President Obama’s spending agenda–which would be unaffordable even in good budget times–is completely unrealistic in this sea of red ink. On top of this baseline, the President would spend trillions of dollars on a new health care plan. This cost would be partially offset by painful tax increases and deep Medicare cuts that, if enacted, would be better spent on meaningful deficit reduction. The President’s stimulus did not create 3.5 million jobs as promised, but it did add $1 trillion in new debt. The effect of these policies is to dig the fiscal hole deeper, forcing future lawmakers to choose between even larger tax increases and deeper spending cuts…

General Budget and Spending Trends: A Look Back 
 
Context: Since World War II, federal spending has generally remained between 18 and 22 percent of GDP. During the Bush Administration, spending increased from 18.4 to 20.9 percent of GDP.

In 2009, spending increased by $535 billion (18 percent), and revenues declined by $419 billion (17 percent). This increased the budget deficit from $459 billion to $1,414 billion.

The 18 percent spending increase in 2009 was the largest single-year expansion of government since the height of the Korean War in 1952.

Overall, from 2001 through 2009, federal spending surged 51 percent faster than inflation. Federal spending per household expanded from $21,510 in 2001 to $29,813 in 2009.

For longer-term comparisons, it is best to measure spending as a percentage of GDP. In 2009, federal spending reached 24.7 percent of GDP–the highest level in American history outside of World War II. Non-defense spending reached a record 20.1 percent of GDP.

Discretionary spending has increased 25 percent in three years–not even counting the $311 billion in discretionary stimulus spending, and approximately $150 billion in annual spending on the global war against terrorists.

Over the entire 2009 through 2020 period, the Troubled Asset Relief Program (TARP) is now expected to cost $99 billion, while the Fannie Mae and Freddie Mac bailouts are estimated to cost $173 billion…

General Budget and Spending Trends: Looking Forward 
 
Between 2010 and 2020, recession-depleted revenues are projected to gradually rebound to 17.6 percent of GDP (slightly below the 18.3 historical average). Spending is projected expand to 25.9 percent of GDP–well above 20.7 historical average. Compared to those averages, 88 percent of all additional deficits by 2020 come from additional spending (5.2 percent of GDP above average), and only 12 percent comes from low revenues (0.7 percent of GDP below average). The table below breaks down where the new spending is coming from.

Much of this spending growth will be driven by entitlements such as Social Security, Medicare, and Medicaid. Over the next decade, the CBO projects that Medicare will expand by 7 percent annually, Medicaid by 5 percent annually (above levels already bloated from the recession), and Social Security by 5 percent annually. These programs face a 75-year shortfall of $43 trillion.

Deficits and Public Debt

Context: Before 2009, the largest budget deficit recorded since the end of World War II had been 6.0 percent of GDP in 1983. The Bush Administration oversaw budget deficits averaging 3.2 percent of GDP.

The 2009 budget deficit of 9.9 percent of GDP shattered the postwar record. Furthermore, the budget deficit is projected to remain above 5.8 percent of GDP indefinitely.

By 2020, the budget forecasts a $1.9 trillion annual budget deficit, a public debt of 98 percent of GDP, and annual net interest spending surpassing $1 trillion.

Over what would be President Obama’s eight years in office, baseline budget deficits are projected to total $9.7 trillion–nearly triple the $3.3 trillion in deficits accumulated by President George W. Bush. The public debt–7.5 trillion at the end of 2009–is projected to triple to $22.1 trillion by 2020.

After remaining between 23 and 49 percent of GDP since the end of World War II, the public debt currently stands at 53 percent of GDP and is projected to reach a peacetime-record 98 percent by 2020.

As the budget deficit increases over the next decade, so will net interest spending, from $187 billion (1.3 percent of GDP) in 2009 to $1,044 billion (4.6 percent of GDP) by 2020. Even that assumes that interest rates remain lower than in the 1990s. An interest rate spike could cost trillions of dollars in additional net interest costs.

The coming tsunami of Social Security, Medicare, and Medicaid costs are projected to push the federal public debt to more than 300 percent of GDP by 2050 and over 700 percent of GDP by 2080.

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