Additional Information About the Updated Budget and Economic Outlook: 2021 to 2031

The Congressional Budget Office regularly publishes its baseline projections of what the federal budget and the economy would look like in the current year and over the next 10 years if current laws governing taxes and spending generally remained unchanged. This report provides additional detail about the agency’s latest baseline projections, which were published earlier this month.

The Budget

CBO projects a federal budget deficit of $3.0 trillion in 2021 as the economic disruption caused by the 2020–2021 coronavirus pandemic and the legislation enacted in response continue to boost the deficit (which was large by historical standards even before the pandemic). At 13.4 percent of gross domestic product (GDP), the deficit in 2021 would be the second largest since 1945, exceeded only by the 14.9 percent shortfall recorded last year.

In CBO’s projections, deficits fall over the next few years as pandemic-related spending wanes. They increase in most years thereafter—boosted by rising interest costs and greater spending for entitlement programs—and reach 5.5 percent of GDP in 2031. (Revenues remain largely stable relative to GDP over the projection period.)

With such deficits, federal debt held by the public totals 103 percent of GDP at the end of 2021 in CBO’s projections. Debt then falls modestly through 2024 and rises thereafter, reaching 106 percent of GDP in 2031—about equal to its previous peak, recorded in 1946.

Changes in CBO’s Budget Projections Since February 2021

Compared with the baseline projections that CBO published in February 2021, the agency’s estimate of the deficit for this year is now $0.7 trillion (or 33 percent) larger, and its current projection of the cumulative deficit for the 2022–2031 period, $12.1 trillion, is $0.2 trillion (or 1 percent) smaller. In 2021, the costs of recently enacted legislation are partly offset by the effects of a stronger economy and technical changes (changes that are neither legislative nor economic). In later years, technical changes that reduce projected deficits more than offset the effects of recently enacted legislation and revisions to the economic forecast.

The Economy

As the pandemic eases and demand for consumer services surges, real (inflation-adjusted) GDP in CBO’s projections grows by 7.4 percent this year and surpasses its potential (maximum sustainable) level by the end of the year. Annual output growth averages 2.8 percent from 2021 to 2025, exceeding the 2.0 percent growth rate of real potential GDP. Over the 2026–2031 period, real GDP growth averages 1.6 percent annually.

Employment grows quickly in the second half of 2021 in CBO’s projections and surpasses its prepandemic level in mid-2022. Inflation rises in 2021 to its highest rate since 2008 as increases in the supply of goods and services lag behind increases in the demand for them. By 2022, supply adjusts more quickly, and inflation falls but remains above its prepandemic rate through 2025. As the economy continues to expand over the forecast period, the interest rate on 10-year Treasury notes rises, reaching 2.7 percent in 2025 and 3.5 percent in 2031—still low by historical standards.

Changes in CBO’s Economic Projections Since February 2021

CBO now projects stronger economic growth than it projected in February 2021 because of recently enacted legislation, the diminishing effects of social distancing, and increased consumer spending. As a result, the agency’s projections of inflation and interest rates are now higher than they were in February.