The third path projection of the CBO

The CBO just issued their latest Long-Term Budget Outlook.  In this, they do projections of the budget all the way through 2046.

The default baseline shows an annual budget deficit of 8.8% of GDP and net interest spending of 5.8% of gdp (up from today's 1.4%).  The category of "other noninterest spending" (which includes all spending, including defense, except for interest, social security, and health care programs) is 7.3% of gdp, down from today's 9.2% of gdp.  Also, it shows federal debt held by the public to be 141% of gdp.

They discuss three alternative paths to the baseline.  The first two paths show what would happen if the ten-year deficits were reduced by $2 trillion and $4 trillion respectively.  The third path is the interesting one.  It shows what would happen if the ten-year budget deficit was increased by $2 trillion.  Since a recession is guaranteed in the next ten years (and probably within the next year) and since politicians love the "free lunch", we can expect the third path to be the most likely one.

In the third path in 2046, the annual budget deficit will be 13% of gdp, of which net interest spending will be 8% of gdp.  And federal debt held by the public will be 193% of gdp.

From the report: In addition to its effects on output, income, and interest rates, the third path would also bring about many of the other consequences associated with high and rising federal debt that are discussed above; those effects would be especially acute under this path because the debt would be so high and rise so rapidly. Such a path would necessitate much larger policy changes to reduce deficits to a particular level than the first two paths would. In addition, it would impose considerable constraints on policymakers and significantly raise the risk of a fiscal crisis.

 I have previously speculated that if net interest spending exceeds 5% of gdp that a fiscal crisis is imminent or at least inevitable.  This will occur either under the baseline scenario or under the third path.  The only way to avoid it is to do serious deficit reduction now (at least $2 trillion in the next ten years).  Since this is very unlikely, here is my conclusion based on the CBO report:

Sometime in the next 20 to 30 years, between 2036 and 2046, the U.S. is facing a fiscal crisis.  A fiscal crisis is defined as a point in time in which investors "lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates.  If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation."
(See https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/07-27_debt_fiscalcrisis_brief.pdf)