The CBO Budget and Economic Outlook in the Post-COVID Fiscal Era
10-year projections signal a worsening fiscal trajectory
The Congressional Budget Office (CBO) just released its latest Budget and Economic Outlook for 2023 to 2033, providing 10-year fiscal projections for the post-COVID fiscal era. The United States is on the tail-end of an unprecedented surge in emergency spending during which inflation hit a 40-year record high. To control this surge in inflation, the Federal Reserve adopted a tighter monetary stance by increasing interest rates. In this context, CBO’s report forecasts a worsening fiscal trajectory characterized by high and rising federal debt. Pandemic spending followed by a surge in interest costs have accelerated pre-existing trends. As Cato's Jeff Miron explains,
“COVID-19 has not changed the fact that [fiscal imbalance] remains large and unsustainable because pre‐pandemic entitlement programs and other expensive policies—notably Medicare, Medicaid, Social Security, and the Affordable Care Act—had already put U.S. fiscal policy on that path.”
Legislators and the administration should adopt a concrete plan to stabilize U.S. debt as a percentage of GDP by reducing the growth in spending. Following are key takeaways from CBO’s report that should motivate lawmakers to take corrective action this year.
Debt will grow to an unprecedented 118 percent of GDP
Federal publicly held debt (the debt the United States has borrowed from credit markets) is currently $24.6 trillion. By 2024, public debt is projected to exceed the annual economic output of the entire country, measured by gross domestic product (GDP). By 2028, public debt will exceed its previous WWII record-high of 106 percent of GDP, rising to an unprecedented 118.2 percent of GDP by 2033 (Figure 1).
Most economic literature agrees that a debt-to-GDP ratio which exceeds 78 percent among industrialized nations has a consistently negative effect on economic outcomes. High and rising debt increases interest rates, reduces incomes, crowds out private investment, and slows growth. It also increases the risk of a sudden fiscal crisis where bond holders lose confidence in the government’s ability or willingness to service debt, without inflating away the debt’s value by reducing the purchasing power of the U.S. dollar.
Unchecked spending is widening deficits
The 2022 budget deficit was $1.4 trillion. That’s $339 billion larger than what CBO estimated in their previous projections. The gap is explained by $426 billion in “unexpected” outlays stemming primarily from the administration’s student debt relief policy. Over the next 10 years, the deficit is projected to average $2 trillion or 6 percent of the GDP every year. The average annual non-crisis deficit, post-Great Recession and pre-pandemic, was about 4 percent of GDP.
Growing spending is driving the growth in deficits. Federal outlays are projected to grow from $6.2 trillion in 2023 to nearly $10 trillion in 2033. That’s a 60 percent increase. Relative to GDP, spending increases from 23.7 percent in 2023 to 25.3 percent in 2033. By comparison, federal revenues will increase from $4.8 trillion in 2023 to $7.1 trillion by 2033; a 45 percent increase. As spending outgrows revenues, Treasury borrows more to make up the difference.
Entitlements drive spending growth
Major entitlements, primarily Social Security and federal health care programs, are almost entirely responsible for the growth in deficits. Social Security spending will grow from $1.3 trillion in 2023 to $2.4 trillion in 2033. Major health care programs, including Medicare and Medicaid, will grow from $1.5 trillion in 2023 to $2.6 trillion in 2033.
Federal health care programs and Social Security will be responsible for 60 percent of projected spending growth. The other large spending growth category is interest costs from servicing the national debt, which will make up 22 percent of projected spending growth. Combined, major entitlement programs and interest will be responsible for 82 percent of projected spending growth over the next 10 years. The remainder of spending growth is be attributed to discretionary spending growth as other mandatory spending is projected to remain flat.
The two largest entitlement programs are on the path to insolvency. Social Security’s combined trust funds are projected to be exhausted by 2033. Medicare’s Hospital Insurance trust fund is projected to run out of money by 2028. Both these programs rely on benefits formulas in statute that Congress adopted decades ago. Lawmakers should prioritize entitlement reforms that reduce future costs to prevent indiscriminate benefit reductions when the trust funds are depleted. Without significant entitlement reform, it will also be impossible to get debt growth under control.
Runaway interest costs will strain federal resources
As the government borrows more, interest costs rise. In 2023, CBO expects net interest costs to total $640 billion, consuming 13 percent of federal revenues this year. By 2033, CBO’s baseline projects net interest costs reaching $1.4 trillion or 20 percent of revenues that year. To put that number in context, the federal government will spend more on interest payments in 2033 than it has historically spent on research and development, infrastructure, and education combined. If average annual interest rates were 1 percentage point higher than CBO projects, interest costs will rise to nearly $2 trillion by 2033. That’s a cumulative interest cost increase of $4 trillion over 10 years.
As interest costs increasingly consume a larger portion of federal revenues, policymakers will be forced to choose between paying interest on the debt and funding other critical spending priorities from defense to public health.
Make fiscal progress a priority this year
CBO’s baseline projections should set off alarm bells in Congress and across the country. Public debt at 118 percent of GDP by 2033 increases the risks of a U.S. fiscal crisis, limits the government’s ability to respond to unforeseen emergencies, and slows economic growth.
If anything, CBO’s projections may be too optimistic, as they do not account for the possibility of a major military conflict, a financial crisis, or a significant public health emergency over the next decade. Congress repeatedly demonstrates that legislators will spend far more in response to emergencies.
Congress and the administration should adopt a credible fiscal stabilization plan this year. Such a plan should fix unsustainable deficit spending by limiting the growth of discretionary and major entitlement spending. The debt limit is one such leverage point to significantly change the U.S. fiscal trajectory for the better.