The “fiscal cliff” deal, combined with the debt-limit agreement of August 2011, only slightly delays the United States reaching debt-to-gross domestic product levels that would damage the economy and risk another fiscal crisis, according to a report from the Peter G. Peterson Foundation released on Tuesday.
The agreement “may have prevented the immediate threats that the fiscal cliff posed to our fragile economic recovery, but we haven’t remotely fixed the nation’s debt problem,” said Michael A. Peterson, president and COO of the Peterson Foundation.
“The primary goal of any sustainable fiscal policy is to stabilize the debt as a share of the economy and put it on a downward path, and yet our nation is still heading toward debt levels of 200 percent of GDP and beyond,” he said.
The report concludes that the recent round of deficit-reduction measures won’t make major improvements because they fail to address most of the major contributors to the debt and deficit, including rapidly rising healthcare costs.
The analysis suggests that lawmakers take action quickly to ensure that the nation is on a sustainable fiscal path.
At a House Ways and Means Committee hearing last week, lawmakers and budget experts agreed that rising healthcare costs, such as Medicare, must be addressed this year as part of efforts to overhaul the tax code and entitlement programs.
“Until spending in those areas is reduced, tax revenues are increased, or policymakers implement a combination of both, the United States will continue to have a severe long-term debt problem,” the report said.
“Reforms should be implemented gradually, and fiscal improvements must be achieved before our debt level and interest payments are so high that sudden or more draconian reforms are required to avert a fiscal crisis.”
The latest deal that stopped income tax increases for those making $400,000 a year or less may have only improved the burgeoning debt situation by a year.
Scheduled spending cuts from the 2011 budget deal, combined with the fiscal cliff agreement, put the debt on track to reach 200 percent of GDP by 2040, five years later than was projected prior to the passage of the two deals.
The recent deficit-reduction measure gave the nation an additional year before hitting that 200 percent threshold, the report showed.
Sequestration does not improve the outlook much, either.
Even if the budget sequester is fully implemented, federal debt would still reach 200 percent of GDP within about 28 years.
On top of that, the debt will continue to grow between now and 2022, and will accelerate significantly after that.
Debt is now projected to grow from 72 percent of GDP in 2012 to 87 percent in 2022, down only slightly from the 90 percent that was estimated before passage of the most recent deal.
Many economists suggest keeping debt at or below 60 percent of GDP, with research showing that economic growth slows for countries that have debt levels exceeding 90 percent of economic growth.
“Americans shouldn’t be under any false impression that our debt problems are behind us,” Peterson said.
“And because it takes years to implement policies fairly and gradually, we need to make decisions now, before we are forced by markets to take severe action that hurts our economy and our citizens.”