Today, the Congressional Budget Office released An Update to the Budget and Economic Outlook: 2019 to 2029. In that report, we provide our latest projections of the federal budget and the U.S. economy under current law for this year and the decade that follows. Deficits are now expected to be larger than previously projected, primarily because recently enacted legislation raised caps on discretionary appropriations for fiscal years 2020 and 2021. Partly offsetting the budgetary effects of new legislation are revisions to our economic forecast, which pushed down deficit projections. In particular, we reduced our projections of interest rates, which in turn lowered our projections of borrowing costs. We also raised our projections of economic growth in the near term.
CBO’s Budget Projections
In our projections, the federal budget deficit is $960 billion in 2019 and averages $1.2 trillion between 2020 and 2029. Over the coming decade, deficits fluctuate between 4.4 percent and 4.8 percent of gross domestic product (GDP), well above the average over the past 50 years. As a result of those deficits, federal debt held by the public is projected to grow steadily, from 79 percent of GDP in 2019 to 95 percent in 2029—its highest level since just after World War II.
Our projection of the 2019 deficit is up by $63 billion since May (the last time we published our baseline budget projections), and our projection of the cumulative deficit over the 2020–2029 period is now $809 billion larger than it was in May. Primary deficits—that is, deficits excluding net outlays for interest—are now projected to be a total of $1.9 trillion greater over the 10-year period than they were projected to be in May. That increase in projected primary deficits is partly offset by a net reduction of $1.1 trillion in our projections of interest costs over that same period—which stemmed from the combined effects of legislative, economic, and technical changes—yielding the $809 billion increase in total deficits just mentioned.
The increase in our 10-year deficit projections is mainly the result of two legislative changes and a change in our economic projections. (The amounts of those changes shown below include interest costs or savings from the resulting changes in debt.)
- First, an increase of $1.7 trillion resulted from the enactment of the Bipartisan Budget Act of 2019, reflecting an assumption—which CBO made in accordance with laws that govern its baseline projections—that the increased funding in 2021 resulting from the act will continue and grow at the rate of inflation in future years.
- Second, supplemental appropriations for disaster relief and border security for 2019—which CBO also assumed will grow with inflation in future years, in accordance with laws governing baseline projections—added $255 billion.
- Offsetting those increases was a third change: Downward revisions to our forecast of interest rates reduced our projections of interest costs, and thus our projections of deficits, by a total of $1.4 trillion.
There were some smaller changes as well, which added $0.3 trillion to projected deficits.
The nation’s fiscal outlook is challenging. Federal debt, which is already high by historical standards, is on an unsustainable course, projected to rise even higher after 2029 because of the aging of the population, growth in per capita spending on health care, and rising interest costs. To put it on a sustainable course, lawmakers will have to make significant changes to tax and spending policies—making revenues larger than they would be under current law, reducing spending below projected amounts, or adopting some combination of those approaches.
CBO’s Economic Projections
The economy was strong in 2018 and the first half of 2019. Real (that is, inflation-adjusted) GDP grew by 2.5 percent in 2018 and is projected to grow by 2.3 percent this year, the same rate that we projected in January (the last time we published our economic projections). The slowdown in growth this year largely results from slower growth of business fixed investment—that is, spending by businesses on equipment, nonresidential structures, and intellectual property products. Real output this year is projected to exceed our estimate of its potential (that is, its maximum sustainable) level. Unemployment has been low, and wages have risen. Since late 2016, wage growth has been especially strong for those earning low wages.
In CBO’s projections, from 2019 to 2023, economic growth gradually slows as the growth of consumer spending subsides; as growth in purchases by federal, state, and local governments ebbs; and as trade policies weigh on economic activity, particularly business investment. Higher trade barriers—in particular, increases in tariffs—implemented by the United States and other countries since January 2018 are expected to make U.S. GDP about 0.3 percent smaller than it would have been otherwise by 2020. Tariffs reduce domestic GDP mostly by raising domestic prices, thereby reducing the purchasing power of consumers and increasing the cost of business investment. Tariffs also affect business investment by increasing businesses’ uncertainty about future barriers to trade and thus their perceptions of risks associated with investment in the United States and abroad.
Over the 2020–2023 period, economic growth averages 1.8 percent, as real output returns to its historical relationship with potential output. That projected growth rate is faster than what we projected in January—partly because of the increased projections of discretionary spending resulting from the Bipartisan Budget Act of 2019.
From 2024 to 2029, projected growth (which is largely determined by underlying trends in the size of the labor force and productivity) is similar to what CBO has projected for the 2020–2023 period. Both output and potential output are projected to grow at an average pace of 1.8 percent per year, which is less than the long-term historical average. That difference occurs primarily because the labor force is expected to grow more slowly than it has in the past.
A range of developments, such as unexpected changes in international conditions, business confidence, or productivity growth, could make economic outcomes differ significantly from our projections. Prospective changes in trade policies add to the projections’ uncertainty. For example, if new trade agreements lowered trade barriers or established stronger protections for U.S. intellectual property abroad, economic growth could be faster than we project. Conversely, if trade barriers rose higher or concerns about such developments increased, domestic investment and output could be slower than we project.
Phillip. L. Swagel is CBO’s Director.