CBO Estimates Debt to Approach 100 Percent of GDP Within a Decade

Chris Gaetano
Published Date:
Apr 10, 2018
America sinking debt

The Congressional Budget Office (CBO), in its annual Budget and Economic Outlook report, released yesterday, estimated that U.S. public debt will go from 78 percent of gross domestic product (GDP) this year to 98 percent by 2028. This percentage would be the largest since 1946 and well more than twice the average over the past 50 years. The rate would be even higher if the government extends the temporary tax cuts that are set to expire in 2026; delays or even ceases implementing taxes connected with the Affordable Care Act; fails to enact scheduled discretionary spending limits and in fact increases appropriations; and provides inflation-adjusted emergency appropriations for nondefense discretionary programs equal to the average amount of such funding from 2012 through 2017—about $11 billion—each year between 2019 and 2028, rather than the roughly $100 billion a year projected in the baseline. 

"In that scenario, far larger deficits and much greater debt would result than in CBO’s baseline projections for the 2019–2028 period. Deficits would be larger by an average of a full percentage point of GDP, rising by a total of $2.6 trillion to yield a cumulative deficit of nearly $15 trillion over that period. And debt held by the public would reach about 105 percent of GDP by the end of 2028, an amount that has been exceeded only once in the nation’s history. Moreover, the pressures contributing to that rise would accelerate and push debt up even more sharply in subsequent decades," said the CBO summary of the report. 

The CBO warned this would have serious negative effects on the nation: 

  •  * Federal spending on interest payments on that debt would increase substantially, especially because interest rates are projected to rise over the next few years.
  • * Because federal borrowing reduces total saving in the economy over time, the nation’s capital stock would ultimately be smaller, and productivity and total wages would be lower.
  • * Lawmakers would have less flexibility to use tax and spending policies to respond to unexpected challenges.
  • * The likelihood of a fiscal crisis in the United States would increase. There would be a greater risk that investors would become unwilling to finance the government’s borrowing unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.
The CBO's projections are very different than last year's. It attributed this change to the recent passage of the Tax Cuts and Jobs Act, the Bipartisan Budget Act of 2018 and the Consolidated Appropriations Act, all three of which significantly reduced revenues and increased outlays anticipated under current law. It is believed that these new laws will create strong growth in GDP and employment in the short term before slowing down between 2020 and 2026 due to factors such as inflation and interest rate pressure, slower growth in federal outlays, and the expiration of the new personal income tax rates. After that, the CBO estimates that GDP will increase slightly until it grows to match the rate of potential output by 2028. 

The CBO estimates that the 2018 deficit will total $804 billion, about $139 billion more than expected in 2017. The deficit is then expected to continue increasing, rising from 4.2 percent of GDP this year to 5.1 percent in 2022. This percent has been exceeded only five times since 1946, four of them happening during the 2007-2009 recession. The deficit is expected to remain at 5.1 percent of GDP between 2022 and 2025 before dipping to 4.9 percent due to the expected expiration of several provisions in the Tax Cuts and Jobs Act, such as the new individual income tax rates. These expirations, though, are expected to then increase revenues from an estimated 17.5 percent of GDP by 2025 to 18.1 percent in 2026. Revenues have averaged 17.4 percent of GDP over the last 50 years.

At the same time, though, spending is expected to remain at 21 percent of GDP for the next three years (the 50 year average is 20.3 percent), before growing to 23.2 percent of GDP by 2028. This, said the CBO, will mostly be due to the growth in mandatory spending brought about by an aging population and growing interest costs (which are estimated to be roughly triple what they are this year). Discretionary spending, by contrast, is expected to decline in relation with the size of the economy. 

The overall deficit for the 2018-2027 period is now projected to be $1.6 trillion larger than the $10.1 trillion originally estimated, cumulative projected revenues are projected to be $1 trillion lower, and projected outlays are projected to be higher by half a trillion. One silver lining though is that the CBO also estimates that tax receipts from all sources will be $1.1 trillion more over this time period than originally thought. 

The CBO's analysis lines up with comments recently made in an op-ed authored by former Fed chair Janet Yellen along with four other former chairs of the White House Council of Economic Advisers. They said that the blame for the ballooning deficit and debt can be laid at the feet of unsustainable tax cuts and unfunded wars, though another op-ed authored by senior fellows at the conservative Hoover Institution said it was primarily entitlements. Both groups, however, agreed that there is going to be a massive increase in deficits and debt by the U.S. government, and that this was going to be a major problem in the coming years. The White House, by contrast, said that the tax cuts would pay for themselves through increased economic growth, as it believes that the projected $1.8 trillion in additional revenue would cancel out the projected $1.5 trillion in revenue losses, though CNBC said that this estimate assumes policy changes that are not yet certain. 

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