World Economy

US Federal Debt to Rise Faster

US Federal Debt to Rise FasterUS Federal Debt to Rise Faster

The US debt will rise faster than previously expected over the next two decades due to slower economic growth and congressional approval for tax cuts last year, the Congressional Budget Office said late Tuesday.

In its latest report, CBO projected the federal debt will climb from a current 75% of gross domestic product to 122% by 2040. That is up from CBO’s previous estimate of 107% for 2040 and well above a post-World War Two peak of 106% of GDP, Reuters reported.

For 2046, CBO lowered its debt projection by 14 percentage points to 141% of GDP, saying it now expects interest rates to be lower than previously anticipated.

Federal debt held by the public has nearly doubled since 2008 in the wake of the recession and will continue to rise without changes in tax and spending policy, CBO said. Factors driving the increase also include rising costs for Social Security retirement benefits and the Medicare healthcare program for the elderly, as the baby-boom generation retires.

To keep federal debt at its current 75% of GDP, CBO said policymakers would need to agree on a package of spending cuts, tax increases or both, equaling 1.7% of GDP per year. In 2017 alone, the prescribed change would equal $330 billion or $1,000 per person in the United States.

  Fiscal Challenges to Remain

Puerto Rico, the US commonwealth that recently declared a historic default, could be shut out of debt markets for two more years as it battles with fiscal challenges, the island’s governor said on Tuesday.

Governor Alejandro Garcia Padilla said emergency fiscal measures in response to a $70 billion debt were not sustainable and that “Puerto Rico will not endure any more austerity.”

He said a new law enacted by Washington allowing the federal government to appoint a control board would undercut self-government, but added it would help the island confront its fiscal problems.

“Our challenges are not over and prosperity will not return overnight,” the governor said during a discussion at the Brookings Institution, a think tank in Washington.

“It will take maybe two years until the market opens back to Puerto Rico if we do the right thing,” Garcia Padilla said, adding the government had been producing fiscally sound budgets that would help win back creditors. The island has been shut out of debt markets for about a year.

Citing falling debt levels, he said it was a “moment of opportunity” in Puerto Rico, which has struggled with high debt loads and a weak economy for years.

Puerto Rico defaulted on $779 million of constitutionally backed debt on July 1, among its most senior bonds, opting to pay for essential services for its citizens over obligations to creditors.