Budget Projections

How Lawmakers Could Make the Budget Outlook Even Worse

CBO's summary of its budget outlook included a short summary of the long-term debt outlook, which showed debt rising continuously and eventually exceeding the size of the economy. With the full budget report being released earlier this week, CBO has put out a little more detail on what the budget will look like over the next 30 years. Not surprisingly, it shows debt rising significantly in the coming decades with Social Security and particularly health care spending being the main drivers. The fuller detail in the report also allows us to estimate what happens if policymakers don't adhere to fiscal responsibility. The answer: debt goes even higher, reaching 185 percent of GDP in 2050 instead of 150 percent.

CBO's report shows debt reaching 116 percent of GDP by 2036 and 155 percent by 2046, including the negative effects of debt and higher marginal tax rates on the economy. Excluding the economic effects, we estimate that debt would reach 150 percent of GDP by 2050. However, CBO's baseline includes some policy assumptions that may not actually hold up, such as policymakers keeping the sequester in place and allowing temporary tax provisions that have routinely been extended to expire.

Bridge from CBO Baseline to Alternative Budget Outlook
  2026 Debt Effect (Dollars)
2026 Debt Effect (Percent of GDP)
CBO Baseline Debt $23.8 trillion 86.1%
     
Repeal Sequester $897 billion 3.2%
Repeal Health Care Taxes $256 billion 0.9%
Extend Bonus Depreciation at 30% $149 billion 0.5%
Extend Other Temporary Tax Provisions $178 billion 0.6%
Interest $233 billion 0.8%
Total Changes $1.7 trillion 6.2%
     
Alternative Budget Outlook Debt $25.5 trillion 92.3%

Source: CBO, CRFB calculations

The Long-Term Debt Picture Looks Much Worse As Well

The Congressional Budget Office's (CBO) summary of their upcoming budget projections showed a much worse ten-year outlook for deficits and debt, so it should come as no surprise that the long-term outlook looks worse too. CBO provides little detail at the moment about the long-term picture but does say that debt held by the public would grow to 155 percent of Gross Domestic Product (GDP) in three decades. That would be much higher than the historical record of 106 percent in 1946 and well above the 110 percent that CBO projected for the mid-2040s last year.

While CBO does not provide a detailed long-term outlook, we have constructed a rough long-term budget projection based on their ten-year numbers and the long-term debt number they do give. As expected, long-term debt, which was already set to rise rapidly, is on a much sharper upward trajectory now. We roughly project it will exceed the size of the economy in the early 2030s (compared to the late 2030s in last year's projection) and will double the size of the economy by around 2060, something that would not have occurred in last year's projection until around the turn of the next century.

Driving this increase in debt are the same forces behind the ten-year numbers. Social Security and health care spending will rise, especially over the next few decades, due to population aging and health care cost growth. Revenue will also rise but from a lower starting point and at a slower rate. And as debt rises, interest spending will do so as well.

It Could Take $8 Trillion to Balance the Budget

Tuesday’s release of the topline numbers for this year's Congressional Budget Office (CBO) baseline is a gut punch to congressional budget writers. The already-difficult task of balancing the budget is now far harder, requiring nearly $1.4 trillion to plug the deficit in Fiscal Year (FY) 2026 alone. By our math, that would mean about $8 trillion of ten-year deficit reduction to balance the budget, and it would take $3.5 trillion just to stabilize the debt at its current record-high levels.

As we show in our paper on the CBO baseline, the debt is on an even more unsustainable path than previously projected, with deficits expected to rise every year going forward, reaching over $1 trillion by 2022. When comparing the 2016 to 2025 budget window in the January report to last August's numbers, the deficit is now expected to be $1.5 trillion worse than projected. Lower interest rate projections will also, somewhat counterintuitively, make budget goals more difficult to achieve since direct spending cuts and increases in revenue will now receive less credit for interest savings.

As a result, last year's budget resolution, which reached balance by 2024, would fall short this year. In fact, enacting the same budget resolution as last year would now lead to a $300 billion deficit in 2024 and a $400 billion deficit in 2026. Getting to balance will now require more than $2.2 trillion more in savings than last year's congressional budget resolution produced – bringing the total to about $8 trillion.* To put this in perspective, Congress would need to cut primary spending by 15 percent, raise revenue by 17 percent, or some combination of the two.

Our Analysis of CBO's January 2016 Budget and Economic Outlook Summary

The era of declining deficits is over. That's the conclusion of our analysis of the Congressional Budget Office's (CBO) January 2016 Budget and Economic Outlook summary. The report shows that deficits will once again start increasing by $105 billion from Fiscal Year (FY) 2015 to 2016. They will balloon to $1.4 trillion by FY 2026. Trillion-dollar deficits will reappear as soon as FY 2022 – 3 years earlier than CBO projected in August.

Read the full analysis.

The paper discusses how this year's forecast is much worse than last year's, largely due to lawmakers' fiscally irresponsible behavior – including passage of the unpaid-for tax extenders and omnibus legislation in December – as well as a gloomier economic picture. At this rate, public debt levels are expected to reach 86 percent of Gross Domestic Product (GDP) by 2026 – an even-more unsustainable level than our current debt of 74 percent of GDP.

Deficits Rise in Latest Budget Projections

Update: You can view our full analysis here.

The Congressional Budget Office (CBO) just released baseline projections showing rapidly rising deficits and debt rising in the coming years – at a much faster pace than previously projected. CRFB will release a full analysis later today, but the report makes it abundantly clear that the near record-high national debt is on an unsustainable path.

CBO now projects deficits more than tripling, from $439 billion in 2015 to $1.37 trillion by 2026, with trillion dollar deficits returning by 2022 – three years earlier than prior projections.

Debt held by the public, meanwhile, will grow by over $10 trillion from $13.1 trillion at the end of 2015 to $23.8 trillion by 2026. As a share of Gross Domestic Product (GDP), debt will grow from 74 percent of GDP in 2015 – already twice its pre-recession levels – to 86 percent of GDP in 2026. By comparison, August projections showed debt on track to reach roughly 77 percent of GDP, or $21 trillion, by 2025.

 

Budget Deal Takes 20 Years to Offset Its Cost

The recently-enacted budget deal does not offset its ten-year cost like advocates have claimed, but what about the longer-term impact?

The deal clearly falls short of fiscal responsibility in the shorter term and relies in part on timing gimmicks, but the costs are temporary and some of the savings do grow over the long term. As a result, by our rough estimate, the bill will eventually pay for itself, but only after 20 years.

Given our country's fiscal situation, this is quite a long time to wait for a bill's costs to get paid back, which is why legislative scoring rules normally require costs to be offset within 10 years.

Moreover, the bill takes even a few years longer to pay for itself if you don't count the Social Security savings that are being used to close 1.5 percent of Social Security's total shortfall. It's with good reason the pay-as-you-go rules do not allow off-budget savings (e.g., from Social Security) to pay for on-budget costs. The same money cannot be used twice. If one accepts trust fund accounting for Social Security, money from the trust fund cannot be used to pay for general costs unless funds are explicitly transferred out of the trust fund.

(See the link for more on the unified budget and on-budget vs. off-budget effects.)

Budget Deal Truly Offsets Only Half Its Cost

Lawmakers are currently considering a budget deal that would increase appropriated spending, suspend the debt limit until March 2017, reallocate revenue to the Social Security Disability Insurance trust fund, and avoid a spike in some Medicare premiums. Although this bill is being hailed as a fiscally responsible sequester replacement bill, we estimate that when interest is added and gimmicks are removed, only half of the bill's cost is truly paid for.

The legislation includes about $80 billion of direct sequester relief and another $8 billion of Medicare premium relief. But when you include the additional $31 billion increase in war spending (a gimmick that lets policymakers backfill discretionary spending without offsets) and $36 billion of interest costs, the total cost of the bill rises to $154 billion.

Of this $154 billion, about $78 billion is paid for honestly: through a combination of Medicare reforms, reductions in farm subsidies, increases in PBGC premiums, asset sales, tax compliance measures, and other changes (plus the subsequent interest savings). The legislation also includes $20 billion of phony or double-counted savings, mainly from pension smoothing and other timing gimmicks but also from $3 billion of crop insurance savings that lawmakers have promised to repeal later. And the remaining $56 billion of the legislation – mostly the war spending increase and interest costs – is not paid for at all.

Auerbach-Gale Projections Also Show Unsustainable Debt Picture

Alan Auerbach and William Gale at the Tax Policy Center recently released their frequently-updated budget projections. Their new outlook is familiar to those following the official CBO numbers: a somewhat stable near-term outlook but continuously rising debt over the long term. Beyond the overall debt numbers, their report contains a number of interesting tidbits about the composition of the budget and considerations for policymakers in addressing deficits and debt.

Auerbach and Gale's projection shows debt remaining at around 75 percent of GDP over the next three years before rising steadily to 81 percent by 2025. This is somewhat higher than CBO's 2025 debt level of 77 percent of GDP largely due to different policy assumptions the authors make. Specifically, they assume that temporary tax provisions -- including the tax extenders that expired at the end of last year -- are permanently extended and that lawmakers will grow appropriated spending with inflation rather than having it limited by the sequester-level caps. On the other hand, it assumes that war spending is drawn down rather than increased with inflation.

The authors make a number of observations about this ten-year outlook. Maybe most notable is the fact that unlike previous large debt run-ups, like those during wars, the current outlook does not show debt returning to a more normal level after the increase following the Great Recession; debt will continue increase from its already high level.

Interest Rates Continue to Fall in CBO's Forecast

CBO’s latest budget baseline projects ten-year deficit numbers to be slightly smaller than previously estimated, despite the passage of legislation increasing the deficit. The biggest cause: a drop in projected interest rates, which lead CBO to revise down total interest spending by $385 billion, or about 7 percent, through 2025.

CBO now expects rates on three-month Treasury bills to be lower for the next three years before stabilizing at 3.4 percent in 2020, one year later than projected in January. CBO expects longer-term bonds to pay permanently lower interest rates, with ten-year notes ultimately reaching only 4.3 percent instead of 4.6 percent.

This downward revision represents the continuation of a trend we noted last year. Compared to its March 2011 projections, CBO now sees $2.2 trillion less interest spending over the 2011-2021 period, a drop of nearly 40 percent. About 90 percent of that drop is due to lower projections for interest rates and technical factors, and the rest is due to lower debt levels than projected in 2011.

Three Scenarios for Projecting Debt

Our recent analysis of the Congressional Budget Office's (CBO) August baseline focused on CBO's official current law baseline projections, which show debt declining very slightly in the near term from 74 percent of Gross Domestic Product (GDP) this year to 73 percent by 2018 and then rising to 77 percent by 2025. As it turns out, however, the situation could be notably better or notably worse depending on how policymakers handle a few outstanding matters – many a part of the gathering fiscal storm Congress will face this fall.

If lawmakers ignore fiscal responsibility as they have been recently, debt will rise much more rapidly. In our paper we estimated an Alternative Fiscal Scenario (AFS) based on past assumptions CBO has used. The AFS extends expired and expiring tax provisions and permanently repeals the sequester-level discretionary spending caps. And under the AFS, debt will rise continuously every year from about 74 percent of GDP today to 78 percent by 2020 and 85 percent by 2025. Earlier this year, CBO estimated that this level of debt growth could shrink the economy by as much as 7 percent by 2040 compared to the baseline.

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