Interest on the National Debt May Consume Half Your Income Taxes by 2020

by Brian Riedl

The Congressional Budget Office (CBO) updated its ten-year budget baseline yesterday. Ignore the $6.2 trillion deficit headline — it’s based on assumptions that Congress forces the CBO to use to mask the true size of future deficits. The true baseline deficit — based on a continuation of current spending and tax policies — comes to $13 trillion over the next decade. Some details:

— Even as war spending phases out and the economy recovers, the projected budget deficit never drops below $1 trillion, and reaches nearly $2 trillion by 2020.

— The national debt held by the public is set to surpass 100 percent of the Gross Domestic Product (GDP) by 2020.

— By 2020, half of all income tax revenues will go toward paying interest on a $23 trillion national debt.

— Federal spending per household, which has risen from $25,000 to nearly $30,000 over the past three years, would top $38,000 by 2020. The national debt per household, which was $52,000 before the recession, would approach $150,000 by 2020 (all adjusted for inflation).

— Even if all tax cuts are extended, revenues will still surpass the 18.0 percent of GDP historical average by 2020. The reason the deficit will surge 6 percent of GDP above its average is because spending will surge to 6 percent of GDP above its average.

These trends are totally unsustainable — especially as President Obama and Congress dig the hole deeper. White House economists are surely aware that such large deficits cannot happen. And given the president’s refusal to significantly rein in spending, all that may leave is a 20 percent value-added tax (VAT) to finance all this spending. Over the next few years, the question will be whether we finally fix runaway spending, or go down the European VAT route. The status quo is not an option.

Charts and more here

Brian Riedl is Grover M. Hermann fellow in federal budgetary affairs at the Heritage Foundation.

The Corner

The one and only.