UPDATE 1-U.S. CBO forecasts 2039 public debt at 106 pct of GDP

Tue Jul 15, 2014 11:10am EDT

(Adds details from report, health care cost projections)

By David Lawder

WASHINGTON, July 15 (Reuters) - U.S. public debt remains on an unsustainable path and will reach 106 percent of economic output in 25 years versus about 74 percent currently, the Congressional Budget Office said on Tuesday, marking a slight increase from projections made last September.

The non-partisan budget referee agency attributed the changes in its long-term budget outlook based on current tax and spending laws to a slight downward revision in its economic growth projections, partly offset by assumptions of reduced interest rates and health care costs.

The revisions represent essentially no shift in the CBO's view that despite some near-term relief, the federal deficits are unsustainable and could lead to another financial crisis in the long run. It attributes much of the increase in deficits and debt through 2039 to the costs of caring for an aging population, especially the so-called Baby Boom generation.

By 2039, spending on healthcare programs would rise sharply, to 14 percent of gross domestic product, up from a seven percent average over the past 40 years, CBO said. As the federal debt load increases, net interest payments would balloon to 4.7 percent of GDP in 2039 from about 1.3 percent currently.

That will crowd out spending on defense and discretionary programs, reducing them to 7 percent of GDP by 2039 - the smallest share of the economy since the late 1930s.

The slight increase of public debt to 106 percent of GDP in 2039 from the 102 percent level projected last year reflects mainly a downward revision in long-term economic growth that the CBO initially made in February that assumes lower participation in the labor force.

"Economic growth will be slower in the future than it has been in the past, CBO projects, largely because of a slowdown in the growth of the laborforce resulting from the retirement of the Baby Boom generation, declining birth rates and the leveling-off of increases in women's participation in the labor market," CBO said.

But the CBO said these effects would be slightly offset by an assumption that interest rates will not rise as quickly as previously thought, with the 10-year Treasury note yield at 2.5 pct in the long run versus 3.0 percent.

The CBO also continued to revise downward its long-term growth rate projections for health care costs in line with recent trends. It now estimates that Medicare, Medicaid, the Children's Health Insurance Program and subsidies under the Affordable Care Act will equal 8.0 percent GDP in 2039, versus 8.1 percent projected last year.

Although the agency has had difficulty pinning down the root causes of the slower growth in health care costs - CBO officials have cited efficiency improvements by health care providers as one factor - it has revised its 10-year cost projections downward by $1.2 trillion since 2010. (Reporting by David Lawder; Editing by Susan Heavey, Doina Chiacu)