Fiscal Issues

Think the 2013 Debt Crisis Is Bad? Just Wait for 2038


An empty Metro rail car during the morning rush-hour commute on Oct. 3 in Vienna, Virginia

Photograph by Karen Bleier/AFP via Getty Images

An empty Metro rail car during the morning rush-hour commute on Oct. 3 in Vienna, Virginia

When the shape-shifting crisis over funding the government and raising the debt ceiling is finally over, one incontrovertible fact will remain. Unless the U.S. political system can start dealing with fiscal issues on a time frame that transcends short-term fiscal-year deadlines and tactical posturing for the next election cycle, things are really going to suck in the year 2038.

Yes, the government is shut down and the country is just days away from a government default. With the GOP effort to defund Obamacare going nowhere, House Republicans are pivoting toward some sort of modest deal on spending and taxes. The odds are reasonably good that the Republicans and President Obama will come up with a face-saving, short-term fix to end the melodrama.

Things are actually looking less dire on the budget-deficit front, at least for the next several years. The budget shortfall, 10.1 percent of gross domestic product back in 2009, is expected to fall to around 4 percent of GDP this year to a sustainable 2 percent in 2015, according to the Congressional Budget Office.

Yet here’s the thing: That progress means little when one looks at the CBO’s latest long-term debt projections. Unless House Republicans and the White House can come up with the mother of all grand bargains—some $2 trillion in fresh cuts over the next 10 years, according to the CBO—the U.S. fiscal situation will start to deteriorate again early next decade and then snowball into a crisis in about 25 years.

Assuming nothing changes, here is CBO’s baseline budget-deficit projection. It is expressed in terms of debt held by the public (excluding intra-government debt holdings like the Social Security and Medicare trust funds) as a percentage of GDP. This year that ratio is about 73 percent.

Not surprisingly, entitlement spending is the big driver behind America’s ugly debt dynamics. As the population ages, the cost of entitlements will skyrocket. And so we could be looking at public debt clocking in at about 100 percent of GDP in 2038. To put that number in perspective, that would take us back to levels not seen since the World War II era.

Bremner_190
Bremner is an assistant managing editor for Bloomberg Businessweek. Follow him at @bxbremner.

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