CBO: Federal Spending Explosion Threatens Economic Growth

Posted: Dec 04, 2013 3:00 PM

Thanks to an aging population and recently expanded social welfare programs, federal spending is set to explode in coming decades, driving debt up, and damaging U.S. economic growth, according to a new report by the Congressional Budget Office (CBO).

In it's December 4, 2013 "Overview of the Federal Budget," the CBO notes that while the historic averages for federal spending and taxes (as a percentage of gdp) are just 21 and 17.9 percent today, both are set to rise substantially in the coming decades. By 2023, the CBO projects that federal spending will eat up more than 22 percent of gdp, while federal taxes will come to more than 19 percent of gap.

The growth in federal spending is driven entirely by social welfare programs. Defense spending is actually set to decline from just over 4 percent today to less than 3 percent by 2023.

Social Security and government health program spending (like Obamacare) are the real drivers of future federal deficits. As this next chart shows, Social Security and health welfare spending take up just 9.5 percent of gdp today. By 2038, that number is set to jump to 14.2 percent.

Unless taxes are hiked drastically above historically sustainable levels, the federal government is set to drown the U.S. economy in debt. The CBO says such high levels of debt will cause "crowding out of saving and investment" that "lowers future output and income."

"The ability of the government to respond to future challenges," will also be "reduced" according to the CBO, and "the risk of a sharp jump in interest rates" will be "heightened."

The CBO sees three options:

  • Raise federal revenues significantly above their average share of GDP
  • Make major changes to Social Security and federal health care programs
  • Pursue some combination of the two approaches

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