The economy’s gradual recovery from the 2007–2009 recession, the waning budgetary effects of policies enacted in response to the weak economy, and various changes to tax and spending policies—including the caps and automatic spending reductions put in place by the Budget Control Act of 2011—have resulted in the smallest budget deficit since 2008. The deficit in fiscal year 2013 was about 4 percent of gross domestic product (GDP), well below its peak of almost 10 percent in 2009 (see Figure 1-2). If current laws that govern taxes and spending remained generally unchanged—an assumption that underlies CBO’s 10-year baseline budget projections—the deficit would continue to decline over the next few years, falling to 2.1 percent of GDP by 2015, CBO estimates. As a result, by CBO’s estimates, federal debt held by the public also would decline, from 73 percent of GDP in 2013 to 68 percent in 2018.
However, budget deficits would gradually rise again under current law, CBO projects, mainly because of rising interest costs and increased spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through health insurance exchanges). The agency expects interest rates to rebound in coming years from their current unusually low levels, sharply increasing the government’s cost of borrowing. In addition, the pressures of caring for an aging population, rising health care costs generally, and an expansion of federal subsidies for health insurance would cause spending for some of the largest federal programs to increase relative to GDP. By 2023, CBO projects, the budget deficit would grow to 3.3 percent of GDP under current law, and federal debt held by the public would rise to 71 percent of GDP and would be on an upward trajectory.
Looking beyond the 10-year period covered by its baseline projections, CBO has produced an extended baseline that extrapolates those projections through 2038. Those extended projections show a substantial imbalance in the federal budget over the long run, with annual revenues consistently falling short of annual outlays. Budget deficits would rise steadily and, by 2038, would push federal debt held by the public to 100 percent of GDP—close to the peak percentage, which was seen just after World War II—even without factoring in the harm that growing debt would cause to the economy.
In fact, such high and rising amounts of federal debt would have significant negative consequences for both the economy and the federal budget. Those consequences include reducing the total amounts of national saving and income relative to what they would otherwise be; increasing the government’s interest payments, thereby putting more pressure on the rest of the budget; limiting lawmakers’ flexibility to respond to unexpected events; and increasing the likelihood of a fiscal crisis. With effects on the economy included, debt under the extended baseline would rise to 108 percent of GDP in 2038, CBO estimates.
The increase in federal debt would be even greater if certain policies that are now in place but that are scheduled to change under current law were instead continued and if some provisions of current law that might be difficult to sustain for a long period were modified. With such changes to current law, federal debt held by the public would reach 190 percent of GDP by 2038, CBO projects, after accounting for the harmful effects on the economy of the rapidly growing deficits.