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Covid-19 Recession To Push US Debt To Nearly Twice GDP By 2050, Says Congressional Budget Office

The coronavirus pandemic will darken the US long-term fiscal outlook for decades to come, the Congressional Budget Office (CBO) said yesterday, releasing new forecasts that show federal government debt in 2050 will be nearly twice US economic output.

Without changes to tax and spending laws, the federal debt held by the public will reach 195 per cent of GDP by 2050, the CBO said in its long-term budget outlook ― a level approaching the current debt ratios of Japan and Greece.

The non-partisan congressional budget referee said its outlook had deteriorated significantly from a year ago, when it projected US public debt in 2049 would be 144 per cent of GDP. CBO projects federal debt at 98 per cent by the end of 2020, compared with 79 per cent in 2019 and 35 per cent in 2007 before a major financial crisis.

The debt is being propelled by higher US annual budget deficits driven by a slow recovery from a deep pandemic recession, higher interest costs to finance those deficits, and long-anticipated spending growth associated with an aging population on healthcare programs and Social Security.

CBO projects the 2020 deficit reaching 16 per cent of GDP ― the highest since the end of World War Two in 1945. While the share will fall for several years, it will begin rising sharply again by 2028.

The debt swells considerably after 2030, when the CBO assumes that interest rates rise significantly from historically low levels. The projections assume that the average real interest rate on benchmark 10-year Treasury notes would be 0.9 per cent through 2030, then rise steadily, reaching 2.5 per cent in 2050.

CBO director Philip Swagel said that the long-term US fiscal path is unsustainable, putting long-term confidence in the dollar at risk.

“There is no set tipping point at which a fiscal crisis becomes likely or imminent, nor is there an identifiable point at which interest costs as a percentage of GDP become unsustainable,” Swagel said in a statement. “But as the debt grows, the risks become greater.” ― REUTERS

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