Up Front

What CBO Found in its Semi-Annual Check-Up of the Federal Budget

David Wessel

The Congressional Budget Office this week took the federal budget in for a routine check-up, as it does every six months or so. The bottom line: The federal deficit outlook for the next decade has gotten a little better—provided Congress sticks to the spending caps it has written into law.

The CBO projections show two basic points about the fiscal health of the U.S. :

  1. The federal deficit really isn’t a big problem today. CBO now estimates that the deficit (the gap between government spending and revenues) for the current fiscal year will come in at 2.9% of the nation’s gross domestic product (the value of all the goods and services produced in the U.S. in a year.). That is below the average for the past 40 years and a long way from the nearly 10% point hit during the worst of the recession in 2009.
  2. The accumulation of government borrowing due to deficits past and present will push the federal debt (how much the U.S. Treasury owes) to 74% of GDP by the end of this fiscal year on Sept. 30, CBO projects. That’s more than double the pre-recession level and higher than any year since 1950. CBO expects that important measure of fiscal health to stabilize over the next few years, and then begin climbing towards 77% of GDP in 2024 and higher beyond that. See my three-minute animated version of all this:

That’s worrisome for a couple of reasons. It doesn’t give the government much maneuvering room if it needs to borrow a lot to fight another recession or a war. And it means the government will be spending increasingly large sums on interest, much of it paid to foreigners. Interest rates are very low now. This year, CBO expects interest to amount to $231 billion, or 6.6% of all federal spending or 1.3% of GDP. But interest rates are sure to rise over the coming years (although CBO says they won’t rise quite as much as it previously thought.) By 2024, given projected deficits and borrowing, CBO projects the government will shell out $799 billion in interest, or 13.8% of all federal spending or 3% of GDP.

CBO expects the U.S. economy to heal over the next few years—and sees unemployment continuing to fall until it hits 5.6%, its estimate of full employment, at the end of 2017. But it cautioned that it sees “lingering negative effects” from the Great Recession, in part because of sluggish business investment and in part because some idle workers will never go back to work. It said it now expects total wages and salaries “to recover from recent recessionary lows less fully than previously projected.”

CBO, which has been criticized by some for having an interest-rate forecast inconsistent with its growth forecast, said it has rethought all that and marked down its rate projections. In February, it projected that the three-month Treasury bill would yield 3.3% on average in 2017 and the 10-year Treasury note would be at 4.8%. In the new forecast, it puts the three-month bill at 2.1% and the 10-year at 4.8%. Over the ensuing six years, it has moved down its projections for both of those by 0.3 percentage points. This has an impact on projected deficits, given the dimensions of the government’s borrowing. CBO said its updated interest-rate and inflation forecasts reduced its projections of government spending for net interest by $469 billion over the 2015-2024 period, an 8% decline that works out to a decline equal to about 1% of all federal spending over the decade.