This afternoon I briefed the press about The Budget and Economic Outlook: 2018 to 2028, which CBO published today. I delivered the following summary of our analysis, with an accompanying slide deck, An Overview of the Budget and Economic Outlook for 2018 to 2028.
Deficits Are Set to Increase Rapidly Over the Next Four Years
In the Congressional Budget Office’s baseline projections, which incorporate the assumption that current laws governing taxes and spending generally remain unchanged, the federal budget deficit grows substantially over the next few years. Later on, between 2023 and 2028, it stabilizes in relation to the size of the economy, though at a high level. As a result, federal debt is projected to be on a steadily rising trajectory throughout the coming decade—approaching 100 percent of gross domestic product by 2028.
Projected deficits over the 2018–2027 period have increased markedly since we issued our last budget and economic projections in June 2017. The increase stems primarily from tax and spending legislation enacted since then—especially the 2017 tax act, the Bipartisan Budget Act of 2018, and the Consolidated Appropriations Act, 2018.
Economic Growth Is Projected to Be Relatively Strong This Year and Next and Then to Moderate
In our economic projections, which underlie our budget projections, inflation-adjusted GDP, or real GDP, expands by 3.3 percent this year and by 2.4 percent in 2019. Most of this growth is driven by consumer spending and business investment, but federal spending also contributes a significant amount this year.
The growth of real GDP exceeds the growth of real potential (maximum sustainable) GDP over the next two years. This marked cyclical path in real GDP will occur in large part because the recent legislation provides significant fiscal stimulus at a time when there is very little slack in the economy. Those effects, as well as the larger federal budget deficits resulting from the new laws, exert upward pressure on interest rates and prices. During the 2020–2026 period, those factors, along with slower growth in federal outlays and the expiration of reductions in personal income tax rates, dampen economic growth. After 2026, economic growth is projected to rise slightly, matching the growth rate of potential output by 2028.
Between 2018 and 2028, real actual output and real potential output alike are projected to expand at an average annual rate of 1.9 percent. In our forecast, the growth of potential GDP is the key determinant of the growth of actual GDP through 2028, because actual output is very near its potential level now and is projected to be near its potential level at the end of the period.
Potential output is projected to grow more quickly than it has since the start of the 2007–2009 recession, as the growth of productivity increases to nearly its average over the past 25 years. Nonetheless, potential output is projected to grow more slowly than it did in earlier decades, held down by slower growth of the labor force (which results partly from the ongoing retirement of baby boomers).
In our projections, the effects of the 2017 tax act on incentives to work, save, and invest raise real potential GDP throughout the 2018–2028 period. Over the same period, the tax act is projected to boost the level of real GDP by an average of 0.7 percent and nonfarm payroll employment by an average of 0.9 million jobs.*
GDP Is Projected to Be Greater Than CBO Previously Estimated
Our current economic projections differ from those that we made in June 2017 in a number of ways. The most significant is that potential and actual real GDP are projected to grow more quickly over the next few years. Projected output is greater because of recently enacted legislation, data that became available after our previous economic projections were completed, and improvements in our analytical methods. Over the next decade, the unemployment rate is lower in our current projections than in our previous ones—particularly during the next few years, when economic stimulus boosts demand for labor. Also, both short- and long-term interest rates are projected to be higher, on average, from 2018 to 2023.
Deficits and Debt Are Projected to Be Large by Historical Standards
Turning to the budget projections, we estimate that the 2018 deficit will total $804 billion, $139 billion more than the $665 billion shortfall recorded in 2017. In our projections, budget deficits continue increasing after 2018. As deficits accumulate, debt held by the public rises from 78 percent of GDP (or $16 trillion) at the end of 2018 to 96 percent of GDP (or $29 trillion) by 2028. That percentage would be the largest since 1946 and well more than twice the average over the past five decades.
For the next few years, revenues hover near their 2018 level of 16.6 percent of GDP in our projections. Then they rise steadily, reaching 17.5 percent of GDP by 2025. At the end of that year, many provisions of the 2017 tax act expire, causing receipts to rise sharply—to 18.1 percent of GDP in 2026 and 18.5 percent in 2027 and 2028. They have averaged 17.4 percent of GDP over the past 50 years.
In our projections, outlays for the next three years remain near 21 percent of GDP, which is higher than their average of 20.3 percent over the past 50 years. After that, outlays grow more quickly than the economy does.
That increase reflects significant growth in mandatory spending—mainly because the aging of the population and rising health care costs per beneficiary are projected to increase spending for Social Security and Medicare, among other programs. It also reflects significant growth in interest costs, which are projected to grow more quickly than any other major component of the budget, the result of rising interest rates and mounting debt. By 2028, net outlays for interest are projected to be roughly triple what they are this year in dollar terms and roughly double when measured as a percentage of GDP. In contrast, discretionary spending is projected to decline in relation to the size of the economy.
Deficits Are Projected to Be Larger Than CBO Previously Estimated
For the 2018–2027 period, we now project a cumulative deficit that is $1.6 trillion larger than the $10.1 trillion that we anticipated in June. Projected revenues are lower by $1.0 trillion, and projected outlays are higher by $0.5 trillion.
Laws enacted since June 2017—above all, the three mentioned earlier—are estimated to make the cumulative deficit $2.7 trillion larger than previously projected between 2018 and 2027. However, revisions to our economic projections caused us to reduce our estimate of the cumulative deficit by $1.0 trillion over the same period, mainly because of expectations of faster growth in the economy and in wages and corporate profits. Other changes had relatively small net effects on the projections.
Deficits and Debt Would Be Larger If Some Current Policies Were Continued
CBO also analyzed an alternative scenario in which current law was altered to maintain major policies that are now in place—so that substantial tax increases and spending cuts would not take place as scheduled under current law—and to provide more typical amounts of emergency funding than the sums provided for 2018. In that scenario, far larger deficits and much greater debt would result than in CBO’s current baseline projections. 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. Such high and rising debt would have serious negative consequences for the budget and the nation. In particular, the likelihood of a fiscal crisis in the United States would increase.
* Value for nonfarm employment corrected on April 17, 2018