WASHINGTON (AP) -- A new report says that the national debt is on pace to equal the annual size of the economy within a decade, levels that could provoke a European-style debt crisis unless policymakers in Washington can slam the brakes on spiraling deficits.
The Congressional Budget Office study released Wednesday offers a fresh reminder of what's at stake in ongoing talks led by Vice President Joe Biden that are aimed at slashing more than $2 trillion from the federal deficit over the coming decade as the price for permitting the government to take on more debt to pay current obligations.
CBO says the nation's rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax hikes.
"As Congress debates the president's request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff - a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic," said House Budget Committee Chairman Paul Ryan, R-Wis.
The findings aren't dramatically new, but the CBO analysis underscores the magnitude of the nation's fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid.
With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP - the record set in World War II - by 2023.
Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government's ability to respond to unexpected challenges like an economic downturn.
But most ominously, the CBO report warns of a "sudden fiscal crisis" in which investors would lose faith in the U.S. government's ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, CBO warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.
"Earlier action would permit smaller or more gradual changes and would give people more time to adjust to them, but it would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations," CBO Director Douglas Elmendorf said in a blog post.