A new study shows that the added revenue from the recent fiscal cliff deal will only stave off a key national debt marker by a couple of years, at best. But what you see depends on where you look — and on what assumptions you make.
A report by the Peter G. Peterson Foundation released Tuesday shows the debt-to-GDP ratio escalating dramatically over the next 25 years, reaching 200 percent of GDP by 2040.
"This unsustainable debt trajectory would be damaging to economic growth long before then," the report read, "forcing policymakers to act much sooner to prevent a serious fiscal crisis and preserve national prosperity. Many economists suggest keeping debt at or below 60 percent of GDP — a target many countries have adopted — and empirical research indicates that economic growth slows for countries whose debt levels exceed 90 percent of GDP."
But this is not the only perspective on the matter, as the Washington Post's Suzy Khimm noted. Khimm points to the Center for Budget and Policy Priorities, which comes up with a much more sanguine analysis, calling for just $1.4 trillion in savings over the next 10 years.
"That’s the amount of deficit reduction that we’ll need to achieve a 73 percent debt-to-GDP ratio by 2022," Khimm wrote, noting that the CBPP hold that the "ratio will be enough to ward off the potential negative consequences of excessive debt."
The CBPP report, released on January 9, does not assume that the $1.1 trillion sequester from the 2011 debt-ceiling deal takes effect. If the sequester were to take effect, only $300 billion more would be needed to reach the 73 percent target.
The graphs used by the two organizations are intriguing. The CBPP graph only reaches out 10 years, showing lines that jump sharply, and then drastically decline before edging upward again by 2022.
The Peterson Foundation graph shows a similar trajectory through 2022, but then shows that upward edge becoming a sharp and sustained spike through 2037 and beyond.
In addition to the longer time frame, one key difference lies in assumptions about health care costs. The Peterson report assumes that health care expenses will continue to grow at a sharp rate, and Medicare and Medicaid would then push the budget over the edge.
Jared Bernstein, a former White House economics adviser and CBPP senior fellow calls this “mostly scaremongering — way too dismissive of progress made so far and over-emphasizing the very long term,” Khimm reported.
Eric Schulzke writes on national politics for the Deseret News. He can be contacted at [email protected].