WASHINGTON (MaceNews) – The following are excerpts from the nonpartisan Congressional Budget Office’s January semiannual update of the budget and economic outlook estimates published Tuesday. The full text is available at cbo.gov.
Budget Outlook for the Next 30 Years
Beyond the coming decade, the fiscal outlook is daunting. In the Congressional Budget Office’s projections, growing budget deficits boost federal debt dramatically over the next three decades (see the table). By 2050, debt is projected to reach 180 percent of gross domestic product (GDP), far higher than any percentage previously recorded in the United States and on track to grow even larger. Relative to GDP, CBO projects, federal debt would be higher and deficits larger over the next three decades than the agency projected in June 2019, when it last updated its long-term budget projections.
Those long-term projections follow CBO’s 10-year baseline projections for the coming decade and then extend the baseline concept for subsequent years.1 The paths of the economic and demographic variables used to construct CBO’s projections are uncertain. But even if their values differed from those underlying the extended baseline projections, federal debt would probably be much higher in 30 years than it is today, if current laws generally remained unchanged.
Projected Spending and Revenues Through 2050
Federal revenues would rise relative to GDP under current law, increasing from 16.3 percent of GDP in 2019 to 18.6 percent in 2050. However, spending would increase even more, rising from 21.0 percent of GDP in 2019 to 30.4 percent in 2050—driven by increases of 4.8 percentage points in mandatory spending and 5.4 percentage points in net outlays for interest. Increases in mandatory spending would result from the aging of the population and growth in per capita spending on health care. Higher interest costs would stem from increases in federal borrowing and rising interest rates. In contrast, discretionary spending is projected to decline by 0.8 percentage points as a share of GDP. All told, the budget deficit in 2050 would be close to 12 percent of GDP, almost four times what it has averaged over the past 50 years.
Changes in CBO’s 30-Year Projections
In CBO’s extended baseline projections, debt in 2049 is equal to 174 percent of GDP, which is 30 percentage points higher than the level the agency projected in June. Three factors account for that upward revision. First, revenues as a share of GDP are projected to be lower, primarily as a result of legislation enacted in December 2019. Second, CBO has increased its projections of spending, largely as a result of legislation enacted in August. Third, CBO has lowered its projections of GDP growth.
Changes in Revenues. The long-term projections for revenues are lower than they were last June, primarily because the tax on employment-based health insurance plans with high premiums was repealed. Other factors, including slower projected economic growth and other legislative changes, also reduced long-term revenue projections. As a share of GDP, revenues in 2049 are now projected to total 18.5 percent, which is 1.0 percentage point lower than CBO projected last June.
Changes in Spending. Projections of spending over the next three decades are higher than those reported last June, primarily because of the higher limits on discretionary funding in 2020 and 2021 put in place by the Bipartisan Budget Act of 2019. (Those higher limits were reflected in the 10-year baseline budget projections that CBO released last August.) The projected path of discretionary spending in the extended baseline is extrapolated from that higher level. Meanwhile, net outlays for interest are initially lower and then higher than CBO previously projected. That pattern results from a downward revision to interest rates in the first decade that is attenuated over the next two decades as greater federal borrowing is projected to put upward pressure on interest rates. Overall, projected spending in 2049 totals 30.0 percent of GDP, 1.7 percentage points higher than in the agency’s June projections.
Changes in Economic Growth. In CBO’s current projections, real (inflation-adjusted) GDP grows at a rate of 1.7 percent per year over the next 10 years, slightly slower than in the agency’s June 2019 projections. Over the subsequent two decades, the rate of growth, at 1.6 percent, is also slower than it was projected to be in June—in part because of slower growth in the agency’s projections of capital services resulting from higher projected deficits in the long term. In addition, CBO now accounts for how changes in long-term population growth and household formation reduce private residential investment. Slightly slower population growth also contributes to the slower growth of GDP.
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Consequences of Rising Federal Debt
If federal debt as a percentage of GDP continued to rise at the pace that CBO projects it would under current law, the economy would be affected in two significant ways:
- That growing debt would dampen economic output over time, and
- Rising interest costs associated with that debt would increase interest payments to foreign debt holders and thus reduce the income of U.S. households by increasing amounts.
The increases in debt that CBO projects would also pose significant risks to the fiscal and economic outlook, although those risks are not currently apparent in financial markets. In addition, high debt might cause policymakers to feel constrained from implementing deficit-financed fiscal policy to respond to unforeseen events or for other purposes, such as to promote economic activity or strengthen national defense. Negative economic and financial effects that were less abrupt but still significant—such as expectations of higher inflation or an increased burden of financing public and private activity—would also have a greater chance of occurring. Those effects would worsen the consequences associated with high and rising federal debt.
To put debt on a sustainable path, lawmakers will have to make significant changes to tax and spending policies—increasing revenues more than they would under current law, reducing spending below projected amounts, or adopting some combination of those approaches.