The Congressional Budget Office is projecting that the federal debt will rise steadily over the next 10 years to nearly 100% of GDP by 2028 — an amount “far greater than the debt in any year since just after World War II.”
The projections are also greater than those projected by the CBO in June due to the tax cut legislation approved since then as well as the latest federal budget and appropriations acts.
“The legislation has significantly reduced revenues and increased outlays anticipated under current law,” the CBO report notes.
The CBO is now projecting a cumulative deficit of $11.7 trillion over the 2018-2027 period, which is $1.6 trillion larger than its projection in June. Revenues are lowered by $1.0 trillion and projected outlays are increased by $500 billion.
For 2018, the deficit is expected to top $800 billion, about $140 billion more than the shortfall last year.
The CBO projects that GDP will expand at an average annual rate of 1.9% between 2018 and 2028, which incorporates a big jump in growth this year to 3.3% followed by slower growth in succeeding years: 2.4% in 2019, then 1.7% from 2020-2026 and 1.8% in each of the next two years.
“The largest effects on GDP over the decade stem from the tax act,” according to the CBO. “Those projected effects grow in the earlier years of the period and become smaller in the later years.”
In the CBO’s projections, budget deficits increase as a percentage of GDP from 4.2% this year to 5.1% in 2022 — a percentage that has been topped in only five of the years since 1946, four of them following the 2007-2009 recession.
Deficits remain at 5.1% through 2025 before dipping in later years to average 4.9% of GDP over the 2021–2028 period.
Revenues are projected to remain near 16.6% of GDP for the next few years, then rise steadily to reach 17.5% by 2025. When some provisions of the tax act expire afterward, revenues are projected to top 18% from 2026 to 2028.
The CBO notes that the revenue growth in later years could decline if lawmakers decide to prevent a “significant increase in individual income taxes in 2026” and reverse funding declines for defense and nondefense discretionary programs in 2020, which would result in “even larger increases in debt.”
Offsetting the rise in revenue, however, is a projected increase in outlays. They’re expected to remain near 21% of GDP over the next three years, then grow more quickly, topping 23% of GDP by 2028.
“That increase reflects significant growth in mandatory spending — mainly because the aging of the population and rising health care costs per beneficiary are projected to increase spending for Social Security and Medicare, among other programs. It also reflects significant growth in interest costs, which are projected to grow more quickly than any other major component of the budget [as] the result of rising interest rates and mounting debt.”
Net outlays for interest paid on federal debt are projected to roughly triple what they are this year in nominal terms and roughly double as a percentage of GDP, according to the CBO.
The agency notes that its projections, especially those for economic growth, however, are “more uncertain than usual this year because they incorporate estimates of the economic effects of the recent changes in fiscal policy,” which are themselves uncertain.
Former Fed Chair Janet Yellen, along with four other former chairs of the White House Council of Economic Advisers, write in today’s Washington Post that the U.S. deficit will be rising in the coming years primarily because of the tax cuts passed last year, not because spending, especially for entitlements, has increased.
“The tax cuts passed last year actually added an amount to America’s long-run fiscal challenge that is roughly the same size as the pre-existing shortfalls in Social Security and Medicare.”
Those cuts made when “the economy was already at or close to full employment … turned economic logic on its head [and] this year’s bipartisan spending agreement contributed further to the ill-timed stimulus,” the authors write.
They argue against reducing the deficit by slashing entitlement programs because those programs are popular and their costs are growing “not because of increased generosity of benefits but because of the aging of the population and the increase in economy-wide health costs.”