This afternoon, I will brief the press about the Congressional Budget Office's new reports, The Budget and Economic Outlook: 2023 to 2033 and Federal Debt and the Statutory Limit, February 2023. I will deliver the following remarks.
Thank you for joining me this afternoon. I am delighted to meet with you in person. First, I’ll talk about the federal budget, then about the economy, and then I’ll touch on the debt limit before concluding.
In our latest projections, released today, the federal budget deficit totals $1.4 trillion in 2023, and annual deficits average $2.0 trillion over the 2024–2033 period. Those projections reflect the assumption that current laws governing federal taxes and spending generally remain unchanged. The deficit amounts to 5.3 percent of GDP in 2023 and grows to 6.9 percent of GDP in 2033—significantly larger than the 3.6 percent of GDP that deficits have averaged over the past 50 years. (The deficit and spending numbers have been adjusted to exclude the effects of shifts that occur in the timing of certain payments when October 1, the first day of the fiscal year, falls on a weekend.)
The cumulative deficit over the 2023–2032 period that we now project is $3 trillion larger than we projected last May, mainly because of newly enacted legislation and changes to the economic forecast that boost interest costs and spending on mandatory programs.
Federal debt held by the public is projected to rise from 98 percent of GDP in 2023 to 118 percent in 2033—an average increase of 2 percentage points per year. Over that period, the growth of interest costs and mandatory spending outpaces the growth of revenues and the economy, driving up debt. Those factors persist beyond 2033, pushing federal debt higher still, to 195 percent of GDP in 2053.
The increase in mandatory spending is driven by rising costs for Social Security and Medicare. Total discretionary spending falls in relation to GDP. As the cost of financing the nation’s debt grows, net outlays for interest increase substantially.
After reaching a historic high in 2022, receipts from individual income taxes are projected to fall in 2023 because collections from taxes on capital gains realizations and other sources, which have been strong in recent years, fall in CBO’s projections. Projected receipts rise after 2025 because of the scheduled expiration of certain provisions of the 2017 tax act.
Now I’ll turn to the economy.
To reduce high inflation, the Federal Reserve has sharply increased the target range for the federal funds rate over the past year. In our projections, the Federal Reserve further raises the target range for the federal funds rate in early 2023 to reduce inflationary pressures in the economy. That rate falls in 2024 as inflation slows and unemployment rises.
Inflation is expected to decline in 2023 as pressures ease from factors that, since mid-2020, have caused demand to grow more rapidly than supply. That decline continues until 2027, when the rate of inflation is projected to reach the Federal Reserve’s long-run goal.
In response to the sharp increase in interest rates that occurred in 2022, the growth of real GDP (that is, GDP adjusted to remove the effects of inflation) comes to a halt in our projections in 2023. As the Federal Reserve reduces the target range for the federal funds rate, real GDP growth rebounds, led by the interest-sensitive sectors of the economy. It averages 2.4 percent from 2024 to 2027 and 1.8 percent from 2028 to 2033.
The unemployment rate rises through early 2024, reflecting the slowdown in economic growth. That rate falls thereafter, as output returns to its historical relationship with potential output (that is, the maximum sustainable output of the economy).
The Debt Limit
Regarding the debt ceiling, the limit on debt of $31.4 trillion was reached on January 19th of this year. The Treasury then began to take well-established “extraordinary measures” to borrow additional funds. We project that, if the debt limit remains unchanged, the government’s ability to borrow using extraordinary measures will be exhausted between July and September 2023.
The projected exhaustion date is uncertain because the timing and amount of revenue collections and outlays over the intervening months could differ from our projections. In particular, income tax receipts in April could be more or less than we estimate. If those receipts fell short of estimated amounts—for example, if capital gains realizations in 2022 were smaller or if U.S. income growth slowed by more in early calendar year 2023 than we project—the extraordinary measures could be exhausted sooner, and the Treasury could run out of funds before July.
If the debt limit is not raised or suspended before the extraordinary measures are exhausted, the government would be unable to pay its obligations fully. As a result, the government would have to delay making payments for some activities, default on its debt obligations, or both.
I will close with three key takeaways from our analysis.
- For 2023, we project stagnant output, rising unemployment, gradually slowing inflation, and interest rates that remain at or above their levels at the beginning of the year—before the economy subsequently rebounds.
- Noninterest spending substantially exceeds revenues in our projections even though pandemic-related spending lessens. In addition, rising interest rates drive up the cost of borrowing. The resulting deficits steadily increase the government’s debt.
- Over the long term, our projections suggest that changes in fiscal policy must be made to address the rising costs of interest and mitigate other adverse consequences of high and rising debt.
Phillip L. Swagel is CBO’s Director.