U.S. Debt Load Among World's Worst

August 10, 2010

This year, U.S. public debt is projected to reach 62 percent of the economy -- up from 40 percent in 2008 and nearly double the historical average, according to recent Congressional Budget Office (CBO) estimates.  The financial crisis and recession drove much of this debt swing, yet larger problems loom in the future, says Nicola Moore, assistant director of the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation. 

By 2030, the CBO projects that debt will more than double to 146 percent of gross domestic product (GDP).  For the United States, addressing the long-term debt challenge must include prompt reform of Social Security, Medicare and Medicaid, says Moore. 

Since 2007, nations across the globe have been following a recipe for rising debt, says Moore: 

  • Government financing surged to ameliorate the global financial crisis, amounting to 13.2 percent of industrialized countries' GDP.
  • Meanwhile, a worldwide recession caused revenues to drop, growth to slow and politicians to pursue false hopes that lavish stimulus spending would somehow stop the bleeding.
  • These anti-recessionary efforts drove advanced economies' deficits collectively up to 20 percent to 30 percent of GDP in three years. 

To assess the impact of age-related spending, the Bank of International Settlements (BIS) ran spending scenarios to project debt through 2040 in 12 countries: 

  • In all scenarios, debt was found to reach unsustainable levels, and the United States was one of the worst performers.
  • That debt is primarily driven by the unfunded obligations held by Social Security, Medicare and Medicaid.  

One of the largest challenges BIS predicts nations will face is that economic output is unlikely to fully recover after global recession ends.  Deficits will likely persist, causing the debt-to-GDP ratio to rise steadily. This would result in serious economic pains.   In the United States, the best way to prevent this disaster is to start with serious and prompt reform to age-related spending in Social Security, Medicare and Medicaid entitlements, says Moore. 

Source: Nicola Moore, "U.S. Debt Load Among World's Worst," Wall Street Journal, August 6, 2010. 

For text:

http://online.wsj.com/article/SB10001424052748703748904575411790755067882.html  

 

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