In the latter years of the 2010s, there was a widening bipartisan sense that fiscal deficits don't really matter. Now, they do again.

Why it matters: The United States fiscal deficit is now at levels that have been surpassed only in deep crises — and are forecast to widen from here, even in the absence of new challenges.

• If unchecked, that would imply higher interest rates and inflation and less private investment and growth in the coming decades, the CBO warned.

By the numbers: The U.S. government is set to run a deficit of 5.8% of GDP this fiscal year, the agency said — a period in which the unemployment rate has averaged a mere 3.6% so far.

• The deficit exceeded that level in only seven years since 1962, all of which coincided with rebounds: 1983 (aftermath of severe recession); 2009-2012 (global financial crisis); and 2020-2021 (pandemic).
• The deficit is on track to narrow as a share of the economy later this decade before soaring in the 2030s and 2040s.
• Those numbers, however, assume relatively steady economic growth — and not the kinds of surprise shocks like major recessions, wars or financial crises that have a way of upending fiscal forecasts for the worse.

Flashback: In the late 2010s, interest rates seemed locked at perpetually low levels, leading to widespread equanimity about the fiscal picture. After all, even though deficits were large, low interest rates meant debt service costs were manageable.

What's changed: For one thing, nearly $5 trillion of emergency pandemic spending added to the pile of debt in a way no one anticipated in 2019.

• "The pandemic created enormous economic losses, and we used borrowing not so much to make the losses vanish into thin air but to spread them out over time," Wendy Edelberg, director of the Hamilton Project and a former CBO chief economist, tells Axios.
• Moreover, the high-inflation environment of the last two years has caused interest rates to rise, making debt service costs higher.

Back in 2017, net interest costs for the U.S. government were only 1.4% of GDP. In 2023, with a higher debt load and higher interest rates, that is on track to be 2.5% of GDP.

• It is forecast to rise steadily from there, implying trillions in government payments to bondholders that would crimp other national priorities.
• Net interest reaches an astounding 6.7% of GDP in 2053 in the CBO projections, though interest costs rising according to the projections would almost certainly generate a course-correction long before then.

What they're saying: "A decade ago Washington was overly obsessed about the deficit," says Jason Furman, an Obama economic adviser and author of an influential 2019 article with Summers titled "Who's Afraid of Budget Deficits?"

• "I don't think it is our No. 1 problem today, but it is time to start paying attention again."
• He adds that deficit reduction now would help control inflation without very high interest rates.

The bottom line: In the early 2010s, as the nation suffered from the aftereffects of the financial crisis, there was probably too much alarm about deficits and debt. Now, there's probably too little.

Go deeper

More encouraging economic news keeps coming: The U.S. economy began the year with more momentum than initially thought.

By the numbers: Gross domestic product grew at a 2% annualized rate in the first quarter, a notable upward revision from the most recent estimate of 1.3% (and the first estimate of 1.1%).

• The quicker pace is a result of stronger growth in exports and consumer spending, particularly on services.

Why it matters: There has been a clear growth slowdown, but the revision shows this slowdown may not be as dramatic as policymakers have thought, thanks in large part to surprising consumer strength.

• "We normally don't cover the third (final) release of GDP but this time around the upward revision was so large that we needed to write about it," Eugenio Alemán, chief economist at Raymond James, wrote this morning.
• He noted it could help put more pressure on the Federal Reserve to maintain its hawkish stance.

Between the lines: GDP has been growing "above estimates of potential over the last three quarters," economists at Brean Capital wrote in a note this morning. "[T]he balance between aggregate demand and supply has not improved."

The intrigue: Gross domestic income (GDI), an alternate scorecard of growth that sums up all income across the economy, paints a bleaker picture of the outlook. But even that is less gloomy than previously thought.

• GDI contracted at a 1.8% annualized rate in the first quarter — less than the 2.3% decline initially reported.