CBO says U.S. deficits set to skyrocket in the years ahead
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The federal government budget deficit is set to soar in the coming years with the rise of spending on health care programs and Social Security as well as interest costs, the Congressional Budget Office projected Wednesday.
Why it matters: The nonpartisan agency's budget outlook is the latest with a gloomy long-term view for the nation's debt and could crowd out private investment, slow growth and risk a crisis.
By the numbers: The federal deficit is on track to be 5.8% of gross domestic product (GDP) in the 2023 fiscal year, before declining to 5% in 2027 — but the shrinkage will be short-lived.
- It will grow every year after before reaching 10% of GDP by 2053, per the CBO.
- From 2023 to 2053, deficits will average 7.3% of GDP — more than double their average over the past half-century.
- Federal debt held by the public will hit 98% of GDP this year, and is on track to surpass an all-time high in 2029 when it reaches 107% of GDP.
Details: Spending will increase more quickly than revenues — attributed to rising interest costs and spending growth on major health care programs and Social Security, as the average age of the population increases.
- Revenues will drop to about 18% of GDP in 2023 and continue to drop until 2026, when tax cuts enacted under former President Trump expire.
- Thereafter, revenues will "generally rise," the CBO says.
- Federal spending will fall to 24% of GDP in 2023, as pandemic-related spending declines. It is expected to continue to decline through 2026, but increase thereafter.
Yes, but: The estimates are somewhat of an improvement from February.
- The agency has slashed its spending projections between over the next two decades — largely due to the spending cut agreement brokered by the White House and Congress to raise the debt limit, the report says.
- Estimates of federal debt held by the public was projected to reach 195% of GDP by 2053 in February. Now that projection is 181%of GDP.
What they're saying: Still, CBO notes several downsides if public debt levels rise to the historically high levels it forecasts.
- "Borrowing costs throughout the economy would rise, reducing private investment," the report says.
- Moreover, higher interest costs paid to overseas bondholders would lower U.S. international income.
- "There would be an elevated risk of a fiscal crisis—that is, a situation in which investors lose confidence in the U.S. governments ability to service and repay its debt," the report says, causing a steep rise in interest rates and an upward spiral in inflation.
The bottom line: The deficit of 5.8% of GDP expected this year is occurring amid a strong economy.
- Unanticipated challenges — a recession, a war, a new pandemic — could stress the U.S. fiscal situation more than the CBO baseline suggests.
