This afternoon I briefed the press about the Congressional Budget Office’s new report, The Budget and Economic Outlook: 2020 to 2030. It shows deficits that are slightly larger over the next 10 years and notably larger over the next 30 years than those that CBO previously projected. I delivered the following remarks.
In the report published today, CBO projects continued economic growth and job creation over the coming decade but also a worrisome trajectory for the federal budget. Not since World War II has the country seen deficits during times of low unemployment that are as large as those that we project—nor, in the past century, has it experienced large deficits for as long as we project.
Let me start with the good news about the economy. We project that real GDP will expand at a solid rate of 2.2 percent this year, driving continued job creation and a historically low unemployment rate. We anticipate that consumer spending, spurred by rising wages and household wealth, will remain strong; we also expect business investment to rebound as several of the factors that weighed on it last year abate. In particular, we expect higher oil prices to boost investment in the energy sector and the impact of trade barriers on economic growth to diminish.
We also project that for several years, the economy will be producing more than what we estimate to be its sustainable level of output, leading to higher inflation and interest rates after a decade in which both remained low, on average. In our projections for the later years of the coming decade, GDP growth moderates and settles back to its maximum sustainable rate of 1.7 percent. That maximum sustainable rate is projected to be lower than its long-term historical average, mainly because the population is aging and the labor force is expected to grow more slowly than it has in the past.
Now for the challenging fiscal situation. In our projections, which incorporate the assumption that current laws governing taxes and spending generally remain unchanged, the federal budget deficit is $1.0 trillion this year and averages $1.3 trillion per year between 2021 and 2030. Measured as a percentage of economic output, the deficit widens from 4.6 percent of GDP in 2020 to 5.4 percent in 2030. Over the past 50 years, the average annual deficit equaled 3.0 percent of GDP, and it was generally much smaller when the economy was strong.
Revenues will grow in our expanding economy. If current laws did not change, federal revenues would rise from 16.4 percent of GDP in 2020 to 18.0 percent of GDP in 2030. Those projections reflect a scheduled increase in individual income taxes at the end of 2025, among other things.
Spending is projected to grow more than revenues, widening the gap between the two. In our projections, federal outlays climb from 21.0 percent of GDP to 23.4 percent over the next decade. That growth has two sources: increased spending for mandatory programs and interest on federal debt.
The increase in mandatory outlays over the decade—from 12.9 percent of GDP to 15.2 percent—is attributable partly to the aging of the population. Another major factor is the growth of health care costs, which has slowed in recent years but is still projected to be faster than economic growth. Those two long-term trends affect Social Security and Medicare in particular, and they are expected to persist beyond 2030.
As for the increase in interest spending, one of its causes is the large deficits, which lead the federal government to borrow more each year in our projections. Another cause is rising interest rates over the next decade. All in all, the federal government’s net interest outlays are projected to increase from 1.7 percent of GDP in 2020 to 2.6 percent in 2030.
As a result of the persistently large deficits, federal debt held by the public is projected to rise to $31.4 trillion at the end of 2030—an amount equal to 98 percent of GDP. At that point, debt would be higher as a percentage of GDP than at any point since just after World War II and more than double what it has averaged over the past 50 years. We project that the gap between spending and revenues would continue to widen over the following two decades and that debt would reach 180 percent of GDP by 2050, well above the highest percentage ever recorded in the United States. And it would be headed still higher.
That debt path would dampen economic output over time. Rising interest costs associated with the debt would increase interest payments to foreign debt holders and thus reduce the income of U.S. households by increasing amounts. Such a significant increase in federal borrowing would also elevate the risk of a fiscal crisis. In addition, it could limit lawmakers’ ability to adopt deficit-financed fiscal policies to respond to unforeseen events or for other purposes. Negative economic and financial effects that were less abrupt but still significant—such as expectations of higher inflation or an increased burden of financing public and private activity—would also have a greater chance of occurring. Those effects would worsen the consequences associated with high and rising federal debt.
To summarize, the U.S. economy is doing well, with low unemployment and rising wages that have drawn people off the sidelines and back into the labor force. But the economy’s performance makes the large and growing deficit all the more noteworthy.
To be sure, interest rates remain low today, suggesting that there is time to address our fiscal challenges and that fiscal policy could be used as a tool to address other challenges facing the nation, if the Congress chose to do so. But our projections also suggest that over the long term, changes in fiscal policy must be made to address the budget situation, because our debt is growing on an unsustainable path.
Phillip L. Swagel is CBO’s Director.