The below chart compares Congressional Budget Office (CBO) long-term projections of the debt held by the public as a percentage of GDP. As you can see, in the five years, the country’s debt outlook has considerably deteriorated.
In 2007, the CBO projected that public debt would equal up to half of total U.S. economic output by 2019. In reality, public-debt-to-GDP passed this milestone in 2009 — ten years ahead of the CBO’s 2007 projection. This is not surprising considering the recession that started in 2007, the reduction in GDP and revenue that followed, and the increase in spending.
Since then, if the economy had recovered from the recession, we should have seen some positive changes to the debt-to-GDP outlook. We have not. As you can see on the chart, CBO currently projects that debt will reach 80 percent of GDP by 2014, which is five years ahead of the 2009 projection, and 13 years ahead of the 2007 projection.
The good news is that we know what needs to be done: We need to cut spending. As it turns out, there is a fairly large academic literature that focuses on the merits of revenue increases vs. spending cuts. My colleague Matt Mitchell had an excellent post a few months ago reviewing it. He writes:
Lots and lots of papers* [The asterisk points to 21 peer-reviewed papers] have now studied this question and the evidence is rather clear: the types of austerity that are most-likely to a) cut the debt and b) not kill the economy are those that are heavily weighted toward spending reductions and not tax increases. I am aware of not one study that found the opposite.
So let’s start cutting.