The Congressional Budget Office (CBO) has released its annual report on US federal spending, and while the impacts of a global pandemic were always going to pose some extraordinary policy challenges, the CBO’s long-term projections make for some harrowing reading for Washington’s fiscal hawks.
Background
One important preface to the report’s findings is that the CBO takes current laws as the baseline for its projections. For example, it assumes current levels of taxation for future revenue forecasts. Obviously, these conditions won’t remain constant over the course of the CBO’s 30-year horizon, as even now the Biden administration is mulling new tax hikes for wealthy Americans and corporations which, if implemented, would alter the United States’ long-term fiscal outlook.
Yet the report still reflects certain realities in US federal finances, namely that non-discretionary spending will consume an ever-growing portion of the US budget going forward, which in turn signals a reckoning in future discretionary spending choices (i.e., social security outlays and defense spending).
Some of the report’s highlights include:
- Federal debt held by the public will surpass 100% of GDP in 2021, and it will hit 202% of GDP by 2051. The 100% threshold has only been breached once before, in the immediate aftermath of World War II, and the 50-year average is over half that at 44% of GDP. Overall debt accumulation has been swift over the past decade, doubling from $9 trillion in 2010 to $21 trillion in 2020. Historically low interest rates in the post-Great Recession period have both encouraged debt build-up and alleviated its short-term fiscal impacts, as the government’s total debt servicing costs have risen only 26% over the same decade-long period. Low rates have helped net interest costs relative to GDP remain at the low level of 1.6% (compared to 3% in 1985). However, this won’t remain the case forever, and the CBO predicts that higher interest rates and rising federal debt will combine to triple net interest spending between 2032-2051. Furthermore, the CBO predicts that yields on the 10-year Treasury will hit 3.4% by 2031, and nearly 5% by 2051.
- Say goodbye to budget surpluses: Driven by spending pressures like rising net interest costs, high primary deficits are projected to become the norm by 2051. The CBO sees deficits decreasing from the current COVID-era highs to hit a low of 3.3% in 2031, before reversing course and starting another ascent to double-digit territory.
