Debt could rise much higher if policymakers extend several costly temporary policies and take on several other deficit-increasing policies in the near term.
On Tuesday, the Committee for a Responsible Federal Budget said that the U.S. debt in 2032 could reach 125 percent of its gross domestic product (GDP) and interest payments could grow to as high as 3.6 percent of the GDP with "irresponsible actions,"
The Congressional Budget Office's (CBO) recent budget projections found that the U.S. debt will reach a record 110 percent of GDP (US$40.2 trillion) by the end of FY 2032, while the deficit will reach 6.1 percent of GDP (US$2.3 trillion) and interest costs will reach 3.3 percent of GDP (US$1.2 trillions).
"These current law projections may prove optimistic, however, since they assume policymakers will allow a number of temporary policies to expire, only grow discretionary spending with inflation, and won't pass any new deficit-financed legislation," the budget group said in an analysis.
According to the Budget and Economic Outlook: 2022 to 2032 released last week, the CBO's current law baseline assumes the Trump-era individual tax cuts in the Tax Cuts and Jobs Act expire at the end of calendar year 2025. If the tax cuts are extended "permanently" and discretionary spending grows with GDP, deficits through FY 2032 would be US$3.1 trillion higher and debt would reach a record 118 percent of GDP by 2032.
Policymakers may undertake several other costly fiscal actions. They may continue various "tax extenders" and "health extenders," and Congress could pass a bill to expand veterans' compensation, a competition bill with funding for semiconductor production, and a bill providing additional funding for restaurants and other small businesses. The Biden administration may consider extending the student loan repayment pause and broadly canceling some amount of student debt.
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"Though it is unclear exactly how much many of these provisions will cost, a reasonable set of assumptions suggests they could add an additional US$2.4 trillion to budget deficits through FY 2032 for a total of US$5.5 trillion of costs above current law. This would cause debt to reach a record 125 percent of GDP by 2032," the group said.
Even under current law, interest spending will rise significantly from 1.6 percent of GDP in 2022 to a record 3.3 percent in 2032, as the Federal Reserve tightens monetary policy, according to the CBO's projections.
"With extensions, interest would increase further to 3.5 percent by 2032, and with the additional actions, it would reach 3.6 percent," the budget group said. "If higher borrowing pushed up interest rates and dampened growth as expected, interest costs would rise even further."
Debt could rise much higher if policymakers extend several costly temporary policies and take on several other deficit-increasing policies in the near term. "Given our bleak fiscal situation, we can't afford more irresponsible actions," it added.
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