The Elephant in the Room

“Under current law, the federal budget is on an unsustainable path,” begins the latest report from the Congressional Budget Office. The report, titled The Long Term Budget Outlook, was about as bad as you’d expect… maybe even worse. At the heart of the matter, this chart:


The CBO (which is a government arm, mind you) predicts that, under the most likely scenario, our national debt will exceed 100% of our GDP by 2023… 200% by the late 2030s. Man, who could have seen this coming?

In formulating their projections, the CBO used two scenarios. The first, the “extended baseline scenario,” assumes things will remain about the same over the next decade… all scheduled changes under current law will occur and all budget projections will be met. The second, their “alternative fiscal scenario,” accounts for budget changes widely expected to occur… like preserving Bush tax cuts for the middle class, reigning in the alternative minimum tax and failure to drastically cut Medicare costs.

Both scenarios paint a dark picture for our fiscal future. No CBO report has ever predicted this much debt, accumulated at such a rate. And we hasten to add, the CBO is assuming — like the rest of the government — that the worst of the recession is largely behind us.

So can we stop this runaway train? Sure, says the CBO… but it won’t be easy. Even under the less severe scenario, “an immediate and permanent reduction in spending or an immediate and permanent increase in revenues equal to 3.2% of GDP would be needed to create a sustainable fiscal path for the next three-quarters of a century.”

If we’re reading this right, that means Uncle Sam will need to cut spending or raise taxes by about $440 billion and maintain those adjustments every year for a long, long time. Under the CBO’s worse, more likely scenario, it’s closer to $740 billion.

The Daily Reckoning