A Congressional Budget Office (CBO) report released Tuesday projects that the federal public debt, currently at 73% of GDP, will hit 100% by 2038.
However, as James Pethokoukis of the American Enterprise Institute points out, buried inside the CBO analysis is another projection taking into account the negative effects such debt would have on the broader economic landscape.
When those factors are considered, says the CBO, debt will explode to 190% of GDP:
Projected budgetary outcomes under the extended alternative fiscal scenario are worsened by the economic changes that result from its policies. With the effects of lower output and higher interest rates incorporated, federal debt held by the public under the extended alternative fiscal scenario would reach 190 percent of GDP in 2038–about 80 percentage points greater than that under the extended baseline with economic feedback– according to CBO’s central estimates.
Economists say nations that 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 drops.
The CBO says it cannot even provide accurate worst-case projections, because debt at that level would hit 250% of GDP by 2038, and “the agency’s model cannot provide reliable estimates of the economic impact of debt exceeding that magnitude.”
As Pethokoukis puts it, “In other words, the models break down. And maybe the economy, too.”