The Congressional Budget Office (CBO) published a summary report on the final numbers for the state of the budget in FY 2021, which closed out at the end of September. On the plus side, the federal deficit eased back slightly from the previous year. However, it still added trillions to the already gargantuan federal debt.
A comparison to pre-pandemic projections indicate that revenues are back on track: total receipts for 2021 match was expected for 2022, indicating a surprising economic rebound. Spending levels should raise red flags: federal spending levels were not projected to reach the $6.8 trillion they hit this year until 2028.
The higher taxes enacted in the infrastructure law and those being contemplated in the reconciliation law run the risk of cutting the economic recovery off at its knees, and the higher spending (despite the budget gimmicks used to garner favorable scores) will add to the already worrisome levels of federal debt.
Deficits
In CBO's January 2020 outlook, completed before the impact of the pandemic, the agency projected that the deficit would reach $1.7 trillion in 2030. The deficit for this year was $2.8 trillion, actually down by 12 percent from 2020 ($3.1 trillion), but still nearly three times higher than the pre-pandemic level ($984 billion in 2019). To illustrate how large the deficit has grown, it is about equal to total federal outlays just eight years ago ($2.8 trillion in 2013).
Revenues
One of the major reasons that the deficit dipped from the previous year was that revenues jumped by 14 percent in 2021, topping $4 trillion. In comparison to the pre-pandemic projection published in January 2020, CBO expected revenues of $3.8 trillion for 2021. The growth in revenues was remarkable and unusual: On average, revenues have grown by about 3 percent since 2000. A revenue spike greater than this has not been seen since 1969, when revenues rose by 22 percent. As a share of GDP, 2021 revenues came in at 18.1 percent, the highest since 2001 (18.9 percent).
Outlays
Total federal outlays rose by a relatively modest four percent, but still reached a new record of $6.8 trillion. A third of spending ($2.3 trillion) resulted from the major entitlement programs: Social Security ($1.1 trillion), Medicare ($692 billion), and Medicaid ($521 billion). Outlays were also impacted by the various pandemic and economic relief bills, which resulted in total outlays of $778 billion for "refundable" credits (up by 88 percent from 2020), and nearly $400 billion for unemployment compensation. Despite the budget challenges, defense spending rose to $718 billion (up by $27 billion from 2020).
Interest Payments on the Debt
Total debt held by the public in 2021 comprised 99.7 percent of GDP, compared to 100.3 percent the previous year. The costs of financing the federal debt rose in 2021 by 7 percent to $413 billion, due to the combination of a large deficit and higher inflation. The amount spent on debt interest payments is roughly equal to total combined outlays projected by the Office of Management and Budget for the Departments of Education, Homeland Security, and Housing and Urban Development ($410 billion). If inflation persists, debt interest payments will grow to consume a larger portion of annual spending. Before the crisis, CBO had developed a “rule of thumb” calculation that, if interest rates were even 0.1 percentage point higher each year than they are in CBO’s economic forecast, the cumulative deficit for 2021 to 2030 would be $185 billion larger than CBO’s projections.
Conclusion
As CBO's budget outlooks repeatedly warn, there are deficits as far as the eye can see, deficits which are only going to grow as demographic pressures on entitlements increase. Chronic deficits crowd out resources available to the private sector and minimize the policy tools available to lawmakers to respond to national emergencies such as that faced in 2020. Lawmakers should also factor in the potential risk that persistent higher inflation will increase the costs of financing the ever-growing debt.
Serious work and progress to address the long-term fiscal imbalance is long overdue. Unfortunately, instead of facing this issue head on, this Congress and the Biden administration are continuing to push for trillions more in spending and using a familiar assortment of budget gimmicks (and harmful taxes) to pretend that their bills are fully-paid for.