Despite dropping deficits, debt picture a concern, watchdog says

July 15, 2014: 2:41 PM ET
NEW YORK (CNNMoney)

Say your doctor told you that your weight problem is imperiling your health. So you lose a few pounds, but that's not nearly enough for the doctor to lay off the warnings.

That's a little like what the Congressional Budget Office is doing with its warnings about high federal debt.

Annual deficits are way down, the CBO said Tuesday. And spending on many programs is on track to reach the lowest level in more than 70 years.

But over the next 25 years, spending will shoot up on major entitlement programs, such as Medicare and Medicaid. And revenue won't keep pace. That will drive federal debt to grow faster than the economy, "a trend that could not be sustained indefinitely," the CBO said.

Such growth could hurt the economy and Americans' financial well-being. Think about it. If the government has to borrow that much more money from investors, there will be less money to invest in the private sector. And the government will have to pay more interest on the debt rather than on government programs that Americans rely on, the CBO said.

Annual federal deficits were crazy high during the financial crisis -- close to 10% as a share of the economy at their peak. But thanks to the economic recovery and a host of spending cuts they've now dropped sharply to around 3% of gross domestic product this year.

But they're set to start climbing again around 2018, and are on track to more than double by 2039, the CBO estimates.

Federal debt held by the public -- essentially an accumulation of deficits over the years -- is already at 74% of GDP, far higher than the historical average of 39%. If current policies remain unchanged, it will top 100% in 25 years, the CBO estimates. And that doesn't include the debt owed to government trust funds such as Social Security.

The crux of the debt problem: A large and growing gap between the money the federal government spends and the money it takes in.

Here's the math: Spending will grow from 21% of GDP today to an estimated 26% in 2039, the CBO estimates. But revenue will only grow from 17.5% of the economy to 19.5% in the same time frame.

The jump in spending is due largely to an aging population, rising health costs and an expansion of federal subsidies for health insurance, the CBO said. Spending on the entitlement programs, including Social Security, is on track to rise to 14% of GDP, double its historical average of 7%.

On the bright side, the CBO did lower its projections of how fast health care costs will grow, in part because health spending to date has been lower than the agency anticipated. Nevertheless, health spending remains one of the fastest growing parts of the budget.

Spending to pay interest on the growing debt, meanwhile, could more than double -- to 4.5% of GDP compared to a 2% over the past four decades.

The federal government, of course, pays for much more than entitlement programs and interest. But when it comes to spending on everything else -- from defense to education to national parks to the IRS -- spending is on track to fall to its lowest levels as a share of the economy since the 1930s, the budget agency said.

-- CNN's Lisa Desjardins contributed to this report

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