The new long-term budget outlook from the nonpartisan Congressional Budget Office, or CBO, reaffirms that the national debt will remain stable over the medium term, while long-term debt projections have fallen dramatically over the past several years. Meanwhile, Congress has severely damaged the economy with deep spending cuts in a misguided attempt to solve a short-term debt crisis that simply does not exist.
The best way to measure the national debt is comparing it to the nation’s gross domestic product, or GDP—the sum total of goods and services produced by workers and capital in the United States. This ratio measures our economy’s ability to manage the debt burden. The most commonly used CBO projection in 2010 estimated that the national debt would exceed GDP starting in 2024 and reach nearly 350 percent of GDP by 2050. The new budget outlook projects that debt will not exceed GDP until 2037, with the debt projection for 2050 falling to 126 percent of GDP. In the short-term, the national debt will actually fall in each of the next three years as a share of GDP. One of the major reasons for the improved budget outlook is that health care costs are growing more slowly than expected, which may be due in part to the Affordable Care Act, or ACA. More work remains to address our long-term budget challenges, but this is not an immediate crisis.
While debt projections have improved, CBO’s economic outlook has deteriorated significantly. Not only is the economy continuing to operate below its potential, but also CBO has grown more pessimistic about how much potential the economy actually has. Economists use potential GDP to measure how much an economy could produce if it were operating at full steam—that is, with low unemployment, high rates of capacity utilization, and stable inflation—or what CBO calls maximum sustainable GDP.
To understand the impact of spending cuts on the overall economy, we can look at CBO’s changing estimates of potential GDP in the first quarter of 2014 and its estimate for potential GDP at the end of 2020. Relative to CBO’s estimates made in 2010 about the state of the economy, its most recent estimate shows growth of the U.S. economy’s supply-side potential is $351 billion smaller now after three years of spending cuts. CBO estimates also indicate the potential future growth path for the U.S. economy decreased by $633 billion through the end of 2020, following the austerity-burdened recovery.
Austerity is moving this key metric in the wrong direction, and CBO’s report shows this policy choice is costing the U.S. economy dearly. CBO forecasts for potential GDP fell as austerity took hold, illustrating the painful and unnecessary costs of cutting spending on public investments, education, nutritional assistance, emergency unemployment insurance benefits, and more. These humane economic policies would be a textbook response that provides targeted fiscal stimulus in a downturn to deliver a strong, stable recovery.
After this latest CBO report, it is clearer than ever that our ongoing experiment with austerity has failed, and it is long past time for Congress to focus on growing the economy instead.
Harry Stein is the Associate Director for Fiscal Policy at the Center for American Progress. Adam S. Hersh is a Senior Economist at the Center.