CBO: Debt will match GDP in 25 years without policy changes

The federal debt is expected to equal the nation's economic output by 2038 unless fiscal policy changes, according to the Congressional Budget Office.

According to CBO calculations, current law -- including the sequester cuts trimming agencies' budgets over the next decade -- will cause debt as a percentage of gross domestic product to decline for five years before rising again.

In 25 years, the CBO projects that the U.S. national debt will match GDP. Federal spending is projected to increase to 26 percent of GDP, up from 22 percent in 2012 and n average of 20.5 percent of the last 40 years.

Total spending on everything other than the major health care programs, Social Security, and net interest payments would actually decline to 7 percent of GDP, well below the 11 percent average of the past 40 years and a smaller share of the economy than at any time since the late 1930s.

By contrast, federal spending for major health care programs and Social Security would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years.

Lawmakers disagree on policy changes to address the CBO projections. Democrats are pushing for increased revenue while Republicans aim to cut Social Security and Medicare spending.

But at the end of the report, the CBO warns that the short term effects of policy changes are negative either way.

"On the one hand, waiting to cut federal spending or raise taxes would lead to a greater accumulation of debt and would increase the size of the policy adjustments needed to put the budget on a sustainable course.

On the other hand, implementing spending cuts or tax increases quickly would weaken the economy’s current expansion and would give people little time to plan for and adjust to the policy changes. The negative short-term effects that deficit reduction has on output and employment would be especially large now, because output is so far below its potential level that the Federal Reserve is keeping short-term interest rates near zero and could not lower those rates further to offset the impact of changes in spending and tax policies."

The report comes amid contentious budget talks surrounding the raising of the debt ceiling and potential government shutdown as well as defunding Obamacare.