CBO Continues to Say the Debt Will Be a Problem for Economic Growth

In its February 2014 Budget and Economic Outlook, CBO continued its previous warnings from last year's February outlook and September's long-term outlook: elevated and rising debt level pose serious risks for economic growth and budget flexibility.

In its latest outlook, CBO highlights on page one the consequences of high levels of debt:

Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt).

Later in the report, CBO touches on how rising debt levels have contributed to the downward revisions in projected growth rates, as a result of population aging, lower labor supply, and lower productivity growth.

A downward revision to the projected growth of the capital stock (reflecting new data and lower projected investment resulting primarily from higher federal debt); the capital stock is now projected to grow by an average of 3.1 percent per year, compared with the 3.4 percent projected previously.

Again, in his testimony on Wednesday morning to the House Budget Committee, CBO Director Douglas Elmendorf reaffirmed the dangers of rising debt. In response to a question from Congressman Tom Price (R-GA) about whether Congress has adequately addressed the risk of a fiscal crisis, Elmendorf stated that the risks of such a crisis are still present and such a scenario, in a variety of potential forms, could put enormous pressures on the federal budget:

"Well, as you know, the Congress has taken a number of steps and I don’t want to diminish those, but it is clear from our report that the fundamental fiscal challenge remains which is significant increases in spending for certain programs. And even though all the rest of the government is on a track to become smaller relative to the size of the economy, we nonetheless show high and rising debt. And that means that the country will need to make choices it has not yet made about cutting back those large programs or raising tax revenue to pay for them."

The takeaway from CBO's latest projections is clear: the long-term economy faces serious challenges to strong growth, include large and rising federal debt. Lawmakers should heed these warnings and recognize that addressing the debt is a central component of an economic growth strategy.