A new report by the Peter G. Peterson Foundation says the mix of tax hikes and spending cuts hammered out during the “fiscal cliff” negotiations bought America just more year before federal debt is 200% of GDP. Instead of that happening in 26 years, it will now happen in 27 in the year 2040.
The reason the fiscal cliff deal failed to improve America’s debt outlook can be summed up in one word: entitlements. Without serious cost-cutting in Social Security, Medicare, and Medicaid, “the United States will continue to have a severe long-term debt problem,” says the report.
“It's simple math: the rapidly aging and longer living baby boomers represent very predictable and fast growing financial costs for the federal government, and existing fiscal policies are not sufficient to sustain these important programs,” says the Peterson Foundation.
The fiscal cliff deal didn’t improve America’s long-term budget outlook significantly, and neither will the sequestration: “Even if the budget sequester under the BCA [Budget Control Act] is fully implemented, projected federal debt would still reach 200 percent of GDP within about 28 years.”
Economists say that nations who keep their debt-to-GDP ratio at 60% or below experience more rapid economic growth. Studies have shown that once a nation’s debt reaches 90% of GDP, economic growth begins to drop.
The federal debt is now projected to go from 72 percent of GDP in 2012 to 87 percent of GDP in 2022, a figure only slightly better than the 90% of GDP that debt was already projected to be prior to the fiscal cliff bill.
The bottom line, says the study, is that the U.S. remains on an unsustainable debt trajectory. “Much more work will be needed to put the federal debt on a sustainable long-term path,” concludes the Peterson Foundation study. “Failing to achieve that goal would put the prosperity and economy of the nation at risk.”