The U.S. budget deficit is set to shrink dramatically this year as pandemic stimulus spending wanes and revenues surge — but the federal budget gap is projected to begin rising again quickly, driven by large increases in interest costs, the Congressional Budget Office said Wednesday in its latest long-term outlook.
While the budget office’s report shows somewhat smaller deficits and debt than previously forecast, it warns that the fiscal outlook remains challenging. Here’s an overview.
Deficits set to drop, then climb again: The deficit for fiscal year 2022 is estimated to be 3.9% of gross domestic product, much narrower than in the pandemic-plagued previous two years and 0.4 percentage points smaller than the budget office projected last year. In CBO’s latest projections, the deficit will drop to 3.7% of GDP in 2023 before rising again. Deficits from 2023 to 2031 are projected to average 4.9% of the economy, 0.5 percentage points larger than in last year’s projections. And further out, from 2043 through 2052, deficits are projected to average 10% of GDP, or about three times the average over the past 50 years. By 2052, the deficit is projected to reach 11.1% of GDP.
Even with that projected growth, long-term deficits in the latest projections are smaller than projected last year, averaging 8.4% of GDP from 2032 through 2051, down 1.3 percentage points from last year’s forecast.
Spending drops, but only temporarily: Federal spending this year is projected to total 23.5% of GDP, less than last year, and is expected to decline over the next couple of years as pandemic spending diminishes. But outlays then grow, climbing to 30.2% of GDP in 2052. Federal spending is expected to average 29% of GDP from 2043 through 2052, up from a projected 25% average for the next ten years. “Rising interest costs and growth in spending on the major health care programs and Social Security—driven by the aging of the population and growth in health care costs per person— boost federal outlays significantly over the 2025–2052 period,” the CBO report says.
Revenues surge this year, but not long-term: Revenues for 2022 are projected to rise to 19.6% of GDP, which CBO calls “one of the highest levels ever recorded.” But revenues aren’t expected to keep pace with projected spending growth, rising only incrementally from an average of 18% of GDP from 2022-2032 to an average of 19% of GDP from 2043 through 2052.
Interest costs are rising rapidly: The CBO estimates that net interest outlays will more than quadruple, rising from 1.6% of GDP this year to 7.2% in 2052. The average interest rate on federal debt is projected to climb from 1.8% in 2022 to 3.1% in 2032 and 4.2% in 2052. “A larger amount of debt makes the United States’ fiscal position more vulnerable to an increase in interest rates than it would be if the amount was smaller,” the CBO report warns. It adds: “If net interest costs followed their projected path, they would exceed all mandatory spending other than that for the major health care programs and Social Security by 2027, discretionary spending by 2047, and spending on Social Security by 2049.”
Debt set to soar: Debt as a percentage of GDP is lower than CBO projected last year, but is still expected to rise from 98% at the end of this year to surpass its historical high by reaching 107% in 2031 and then continuing to climb to 185% by 2052. But the long-term debt projections have improved substantially compared with last year. Federal debt held by the public is now expected to reach 180% of GDP in 2051, down from 202% in last year’s outlook, with the change driven by a strong rebound from the pandemic and less projected spending for major health care programs.
Still, the outlook is based on the assumption that current tax and spending laws remain in place long-term and relies on other optimistic assumptions, meaning that the real debt path could be considerably higher.
“Debt that is high and rising as a percentage of GDP could slow economic growth, push up interest payments to foreign holders of U.S. debt, heighten the risk of a fiscal crisis, elevate the likelihood of less abrupt adverse effects, make the U.S. fiscal position more vulnerable to an increase in interest rates, and cause lawmakers to feel more constrained in their policy choices,” the CBO warns, adding that “if future paths for spending and revenues were more consistent with such paths in the past, debt in 2052 would probably be much higher than CBO projects.”
Economic and demographic challenges ahead: The CBO said that the U.S. economy will grow more slowly over the next 30 years, with nominal GDO averaging 3.9% a year compared to 4.5% over the last three decades. Part of that slowdown is driven by demographics. The report says the U.S. population will grow much more slowly than in the past — just 0.3% a year, or a third of the growth rate over the past 30 years. With lower fertility rates, CBO says population growth by 2043 will be driven entirely by immigration.