In June, the Congressional Budget Office published The 2018 Long-Term Budget Outlook, the latest installment of an annual report describing the agency’s projections of federal spending, revenues, deficits, and debt over the next 30 years. In that report, CBO projected that growing budget deficits would boost federal debt held by the public sharply over the next 30 years; that debt would approach 100 percent of gross domestic product (GDP) by the end of the next decade and 152 percent by 2048. That amount would be the highest in the nation’s history by far. This blog post discusses the uncertainty surrounding those projections.
Even if future tax and spending policies did not vary from those specified in current law, budgetary outcomes would undoubtedly differ from those in CBO’s extended baseline projections because of unexpected changes in the economy, demographics, and other factors. To illustrate the uncertainty of its projections, CBO examined the extent to which federal debt as a percentage of GDP would differ from the amounts in its extended baseline if the agency varied four key factors in its analysis:
- The labor force participation rate,
- The growth rate of total factor productivity,
- Interest rates on federal debt held by the public, and
- Excess cost growth for Medicare and Medicaid spending.
The degree of variation was based on historical movements and on possible future developments. The resulting estimates show that if CBO varied one factor at a time, federal debt held by the public after 30 years would range from 42 percentage points of GDP below the agency’s central estimate—152 percent of GDP—to 60 percentage points above it.
If all four factors were varied simultaneously such that projected deficits increased, federal debt held by the public in 2048 would be about 96 percent of GDP above CBO’s central estimate. Conversely, if all four factors were varied such that projected deficits decreased, debt after 30 years would be 67 percentage points below the central estimate.
Those calculations do not cover the full range of possible outcomes, and they do not address other sources of uncertainty in the budget projections, such as the risk of an economic depression or a major war or catastrophe, or the possibility of unexpected changes in rates of birth, immigration, or mortality. Nonetheless, they show that the main implications of the report apply under a wide range of possible values for some key factors that influence federal spending and revenues. In 30 years, if current laws remained generally unchanged, federal debt—which is already high by historical standards—would probably be at least as high as it is today and would most likely be much higher.
Policymakers could take that uncertainty into account in various ways as they make choices for fiscal policy. For example, they might design policies that reduced the budgetary implications of certain unexpected events. Or they might decide to provide a buffer against events with negative budgetary implications by aiming for lower debt than they would in the absence of such uncertainty.
Aaron Betz is an analyst in CBO’s Macroeconomic Analysis Division. Stephanie Hugie Barello and Charles Pineles-Mark are analysts in CBO’s Health, Retirement, and Long-Term Analysis Division. These projections reflect the work of those three analysts and others in both divisions.