The Debt That Debt Creates


The indefatigable Veronique de Rugy notes the compounding problem of paying interest on the debt:

Based on Congressional Budget Office data, it represents the interest the government paid on the federal debt as a percentage of GDP between 1962 and today and the projected debt service payments up until 2082. The projections are illustrated under the current CBO baseline and under the CBO alternative, more realistic, scenario. For comparison, the graph also shows CBO’s projections for the cost of Medicare and Social Security as a percentage of GDP. Notice that under either of CBO’s scenarios, the net interest payments, or the costs of the debt, rival the cost of two of our nation’s most expensive social programs.

The CBO baseline assumes that the projected 2009 spending level will stay the same as a share of GDP indefinitely, minus stimulus and related spendingit represents “CBO’s best judgment of how economic and other factors would affect federal revenues and spending if current laws and policies did not change,” CBO explains. The more likely “alternative” scenario factors in policy changes “that are widely expected to occur and that policy makers have regularly made in the past.”

The CBO alternative assumes that excise taxes and estate taxes remain constant as a share of GDP over the long term (instead of changing as scheduled under current law). It also assumes that tax provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003the so-called “Bush tax cuts”would be extended, and that the Alternative Minimum Tax would be indexed to inflation.