The Congressional Budget Office (CBO) published its new Budget and Economic Outlook for the next ten fiscal years. The red ink in the projection raises red flags for lawmakers.
The White House has been patting itself on the back for the lower deficit this year. But it’s highly misleading to claim that the country has embarked on a path of fiscal responsibility — pandemic-related spending sent the deficit soaring to $3.1 trillion in 2020 and $2.8 trillion in 2021. As the emergency spending naturally wound down, the deficit fell to $1.38 trillion in 2022. The good news for the deficit ends there.
Despite the tax hikes included in the Inflation Reduction Act, the deficit is set to rise to $1.41 trillion this year. Then, apart from a small dip in 2027, the deficit will continue to rise throughout the next decade, doubling back to $2.85 trillion by 2033.
Below are some additional red flag data points that should get lawmakers focused on spending reform and budget process reform:
It wasn't that long ago that some progressive advocates and lawmakers touting Modern Monetary Theory argued that low interest rates provided a prime opportunity to load up on deficit spending. The economic data since then exposes the folly of that line of reasoning. In 2020, CBO reported that the interest rates on 10-year Treasury notes were 0.9 percent. This year, they have risen to 3.6 percent and CBO projects they will average 3.8 percent over the next decade.
Changes in inflation and interest rates revised CBO's projections of outlays upwards by $2.1 trillion over the next decade since last year’s baseline.
Net interest on the debt will rise from $640 billion this year to $1.43 trillion within a decade.
Revenues are slightly higher than recent historical averages but spending has grown at a faster rate. Outlays will average 24 percent of GDP over the next ten years. By comparison, from 2020 through 2019, outlays averaged 20.4 percent of GDP. Revenues will average 18 percent of GDP over the next decade, compared to 16.8 percent from 2000 through 2019.
Congress and the White House have vowed not to "revisit Medicare or Social Security" as part of debt ceiling discussions, but CBO shows that rising spending on these programs will increase mandatory spending over the next ten years while total discretionary spending will fall as a share of GDP. Over the long term, Medicare and Social Security are on track to eat up ever-larger portions of federal revenue.
CBO projects that publicly-held debt will rise from $25.7 trillion this year to $46.4 trillion in 2033. As a share of GDP, it will grow from 98 percent this year to 118 percent in a decade — the highest level ever recorded — and will continue to rise over the long-term.
It is disappointing that CBO did not include a section on Alternative Fiscal Scenarios as part of this year's outlook report. In the past, CBO has used this valuable addendum to project budget estimates using alternative assumptions about policy and spending. Some of these alternatives can be more realistic than the current-law projection that CBO is required to include in the official baseline.
For example, the individual tax cuts enacted in the Tax Cuts and Jobs Act (TCJA) are set to expire under current law at the end of 2025. If recent history regarding similarly expiring tax provisions is a guide to the TCJA's expiration, lawmakers will act to extend these individual tax cuts. The alternative scenarios section last year showed that retaining the TCJA provisions would reduce revenues by $2.1 trillion through 2022 and increase debt service costs by $201 billion. That section also projected that if discretionary spending were to increase at the growth rate of nominal GDP, $1.48 trillion (including debt service costs) would be added to the deficit.
In a separate report also published today, CBO estimates that the Department of Treasury's ability to use "extraordinary measures" to avoid breaching the debt ceiling — $31.4 trillion — will be exhausted between July and September.
All this should serve as a sharp alert to lawmakers to get serious about addressing the federal government's chronic overspending and its unsustainable fiscal trajectory.