Publication of the CBO’s “The Budget and Economic Outlook: 2018 to 2028” has once again brought attention to the dire outlook for the federal public finances.
The challenge is best thought of in the following way:
1) there is a structural challenge associated with projections for debt‐to‐GDP ballooning in the coming decades due to unchanged entitlement programs interacting with an aging population
2) politicians have sailed us into these fiscal headwinds with a large, structural budget deficit, and debt held by the public is already at its highest level since just after World War II
The policy implications are clear: substantial entitlement reforms are, and always were, necessary if the US were to have any hope at preventing ever‐rising federal debt (as Brian Riedl indicates in this excellent post).
But running something much closer to an overall balanced budget sooner rather than later is needed if the aim is to get the debt‐to‐GDP ratio heading back down towards historic norms over the coming decades.
It’s in this context the CBO numbers are so gloomy.
Over the next 10 years, based on current laws, the CBO estimates that the deficit will instead increase from 3.5 percent of GDP in 2017 to 5.4 percent in 2022, before fluctuating between 4.6 percent and 5.2 percent from 2023 to 2028. This compares with an average annual deficit of 2.9 percent over the next 50 years. Debt held by the public as a result is projected to rise to 96.2 percent of GDP by 2028.
But note this is based on “current law,” and assumes substantial income tax increases in 2025 as individual tax cuts expire, and that there will be spending cuts too.
As the CBO notes:
If those changes did not occur and current policies were continued instead, much larger deficits and much greater debt would result: The deficit would grow to 7.1 percent of GDP by 2028 and would average 6.3 percent of GDP from 2022 to 2028…debt held by the public under that alternative fiscal scenario would reach 105 percent of GDP by the end of 2028, an amount that has been exceeded only one time in the nation’s history.
The CBO data clearly shows that revenue as a proportion of GDP was expected to have risen back to its 2017 level by 2023 even before the expiration of many tax cuts, showing that from then on its rising spending that is driving the worsening outlook in debt over this period.
If the Republicans really wanted to lock in their tax cuts, they needed spending restraint. Instead, now, the fiscal outlook is set to deteriorate, tax cuts are being blamed (even though projections show tax revenues will still increase as a proportion of GDP), and on current policies debt is heading north pretty rapidly.