By Nick Mann | 30 January 2013
The US federal government’s debt will reach 200% of gross domestic product by 2040 despite the deficit reduction measures agreed over the past 18 months, a think-tank warned yesterday.
The Peter G Peterson Foundation said the last-minute political deal to avoid the January 1 ‘fiscal cliff’ of automatic spending cuts and tax increases did ‘very little’ to improve the US’s long-term budget outlook.
The automatic spending cuts – or sequestration – that were originally agreed in the 2011 Budget Control Act and are now set to take effect on March 1 would still not improve the outlook ‘significantly’, it said in Past the cliff, but not out of the woods.
Together, the measures in the fiscal cliff deal – the American Taxpayer Relief Act – and the Budget Control Act have only delayed the US reaching a 200% debt-to-GDP ratio by five years, the report said. If current policies continue, the think-tank expects the federal debt-to-GDP ratio to increase from 72% to 87% over the next ten years.
Michael A Peterson, president of the Peter G Peterson Foundation, said: ‘The American Taxpayer Relief Act may have prevented the immediate threats that the fiscal cliff posed to our fragile economic recovery, but we haven’t remotely fixed the nation’s debt problem
‘The primary goal of any sustainable fiscal policy is to stabilise the debt as a share of the economy and put it on a downward path, and yet our nation is still heading toward debt levels of 200% of GDP and beyond.
He added: ‘Americans shouldn’t be under any false impression that our debt problems are behind us. And because it takes years to implement policies fairly and gradually, we need to make decisions now, before we are forced by markets to take severe action that hurts our economy and our citizens.’
Improving the US debt situation will require either reduced spending on health care entitlements and social security, increases in taxation, or a combination of both, the report said.
‘It’s simple math: the rapidly ageing and longer living baby boomers represent very predictable and fast growing financial costs for the federal government, and existing fiscal policies are not sufficient to sustain these important programmes’, it added.
