The federal budget outlook

In light of recent economic trends and the most recent Congressional Budget Office projections (CBO 2023), we offer new perspectives on the medium- and long-term fiscal outlook, updating our previous work, most recently in Auerbach and Gale (2022).

The basic story is familiar. Low revenues coupled with rising outlays on health-related programs and Social Security drive permanent, rising primary deficits as a share of the economy. Net interest payments also rise substantially relative to GDP due to high pre-existing debt, rising primary deficits, and gradually increasing interest rates. Unified deficits and public debt rise accordingly.

Under current law for the next 10 years, the CBO’s projections imply that persistent primary deficits will average 3.0% of GDP. Net interest payments will rise from 2.4% of GDP currently to 3.6% in 2033, an all-time high. The unified deficit, and even the cyclically adjusted deficit, will exceed 7% of GDP at the end of decade. Debt will rise from 98% of GDP currently to 118% by 2033, another all-time high.

Over the following two decades, the projected trends are even less auspicious. Primary deficits rise further as spending on Social Security and health-related programs continue to grow faster than GDP and revenue growth remains anemic. The average nominal interest rate on government debt rises to exceed the nominal economic growth rate by 2046, setting off the possibility of explosive debt dynamics.  By 2053, relative to GDP, annual net interest payments exceed 7%, the unified deficit exceeds 11%, and the public debt stands at 195%. All these figures would be all-time highs (except for deficits during World War II and in the first two years of the COVID-19 pandemic) and would continue to grow after 2053.

Budget outcomes would be even worse under “current-policy” projections that incorporate more realistic policy choices than those required by the baseline calculations. Allowing minor adjustments to discretionary spending to maintain current services per capita and making  temporary tax provisions—such as those in the Tax Cut and Jobs Act of 2017—permanent would drive the debt-to-GDP ratio to 240% by 2053.

Fiscal gap calculations indicate the magnitude of the changes required to meet a future fiscal target. For example, starting from the current-law baseline, we estimate that to keep the debt-to-GDP ratio at its current level (98%) in 2053 would require a combination of permanent spending cuts or tax increases equaling 3.14% of GDP if implemented starting in 2024. This represents about $824 billion in today’s economy, or about 33% of current income tax revenues, a 17% increase in all current tax revenues, a 15% reduction in current non-interest spending, or a 25% reduction in current non-interest spending other than Social Security and Medicare.  Delaying the implementation of the actions would raise the size of the intervention needed.

The fiscal outlook has changed somewhat over the past year.  Recent legislation, higher projected defense spending, and higher projected interest rates have raised the cumulative 10-year deficit by about $3.1 trillion through 2032 under current law, with interest accounting for about half of that difference. The projected 2052 debt-to-GDP ratio rose from 185% to about 190%. In both baselines, of course, the debt-to-GDP ratio would continue rising thereafter.

Long-term budget projections, of course, are sensitive to parameter choices, and in particular are sensitive to interest rate projections. But it would take enormous and unlikely favorable variation from baseline parameters to put fiscal policy on a sustainable course.

Section II describes the construction of different budget baselines. Section III summarizes how projections for gross domestic product (GDP) and interest rates have changed over the past year. Section IV examines the 10- and 30-year current-law budget projections as of February 2023 and compares them to the July 2022 baseline. Section V estimates the effects of current-policy adjustments relative to current law. Section VI discusses cyclically adjusted deficits and sensitivity analysis. Section VII calculates fiscal gaps under various scenarios. Section VIII concludes with a discussion of a variety of perspectives on and interpretations of the budget outlook.

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