This evening, I delivered the following remarks at the annual dinner of the Committee for a Responsible Federal Budget (CRFB).
I’m delighted to be here with a group of people who share my interest in—and concern about—the federal budget. I’m proud to have been associated with the CRFB in the past: In addition to being a longtime consumer of your output, I was privileged to serve on an advisory panel that helped give Ed Lorenzen, whom we all miss dearly, outside feedback about your work.
Since I joined CBO four months ago, it has been a great treat for me to work with and learn from its skilled, knowledgeable, and dedicated people. Some of the issues at CBO have been new to me, but the budgetary challenge that the nation faces is all too familiar.
Even though the U.S. economy has been strong, with a low unemployment rate and rising wages, the federal budget deficit remains large, and debt is growing. We project that, under current law, federal debt held by the public would equal 95 percent of GDP by 2029, the highest level since just after World War II—and our most recent long-term projections put debt at close to 150 percent of GDP in 30 years. Under some plausible alternative policy scenarios, debt would be even greater. CBO projects that the rising debt would dampen economic output over time. Also, rising interest costs associated with that debt would increase the federal government’s interest payments to foreign debt holders and thus reduce the income of U.S. households by increasing amounts. In our projections, those interest costs rise partly because the total amount of debt grows but also because of market interest rates. Those rates are low today—as CBO’s latest economic forecast shows—but are projected to rise.
The people in this room understand how high and rising debt poses substantial risks for the nation. In particular, it increases the risk of a fiscal crisis—that is, a situation in which the interest rate on federal debt rises abruptly because investors have lost confidence in the U.S. government’s fiscal position. It also increases the likelihood of less abrupt but still significant economic and financial consequences, such as expectations of higher inflation and more difficulty financing public and private activity in international markets.
There is no agreement on what the nation’s appropriate long-term goal for debt ought to be, but it is clear that the budget is on an unsustainable course. Reducing deficits and debt will be difficult. The government will ultimately have to make changes to services, benefits, and programs; require taxpayers to pay more to finance those activities; or implement some combination of the two approaches.
Faster or slower implementation of policies to reduce budget deficits would impose different burdens on different generations over the course of their lifetimes. Also, policy changes could have sharply different effects on different groups within any given generation. Reducing deficits sooner would probably require older workers and retirees to sacrifice more but would benefit younger workers and future generations. Reducing deficits later would require smaller sacrifices from older people but greater ones from younger workers and future generations.
Moreover, the further in the future a policy change occurred, the more the well-being of older generations would be improved and that of younger generations worsened. However, the additional burden on younger generations resulting from delaying policy changes would be relatively small compared with their lifetime earnings potential because, on average, future generations are expected to have much higher income than current generations have.
Even if lawmakers waited to reduce deficits, deciding sooner about any eventual changes would offer two main advantages. First, people would have more time to prepare. Second, policy changes that reduced the debt over the long term would hold down longer-term interest rates and could lessen uncertainty—thus enhancing businesses’ and consumers’ confidence. Those factors would boost output and employment in the near term.
CBO will continue to inform the Congress about the budgetary outlook and its consequences and to support lawmakers as they address important budget and economic policy issues. We are working hard to make further strides in ensuring that our work is insightful, transparent, and—as always—objective and impartial. I hope that you will find it useful in your own work and that you will let us know if there are things we can do better. Many thanks.
Phillip L. Swagel is CBO’s Director.