CBO Releases January 2025 Budget and Economic Outlook

The Congressional Budget Office (CBO) released its January 2025 Budget and Economic Outlook today, projecting that the national debt remains on an unsustainable upward trajectory. Debt will eclipse its record as a share of the economy in 2029 and climb to 118 percent of Gross Domestic Product (GDP) by 2035.

According to CBO’s new projections:

• Debt held by the public will rise from nearly $29 trillion today, or roughly 98 percent of GDP, to $52 trillion by 2035, or 118 percent of GDP.
• Deficits will total $22 trillion (5.8 percent of GDP) over the next decade.
• Spending will grow from 23.3 percent of GDP in 2025 to 24.0 percent by 2035, while revenue will grow from 17.1 percent of GDP in 2025 to 18.3 percent by 2035 under current law, which assumes the expiration of the 2017 tax cuts at the end of this year.
• Interest costs will match their record as a share of GDP in 2025 – 3.2 percent – and rise to 4.1 percent of GDP by FY 2035.
• The economy will continue growing at a steady clip, with real GDP growth averaging 1.8 percent over the decade, unemployment and inflation normalizing around 4.4 percent and 2.0 percent, respectively, and 10-year Treasury notes averaging 3.8 percent by the end of the decade.

Debt and Deficits

Under CBO’s baseline, federal debt held by the public will grow by $23 trillion over the next decade, from $29 trillion today to $52 trillion by the end of FY 2035. As a share of the economy, debt will rise from 100 percent of Gross Domestic Product (GDP) at the end of 2025 to 107 percent by 2029 – surpassing the prior record set just after World War II – and 118 percent of GDP by 2035.

CBO projects the deficit will be 6.2 percent of GDP in 2025 ($1.9 trillion), then fall to 5.5 percent of GDP in 2026 ($1.7 trillion) after elements of the 2017 Tax Cuts and Jobs Act (TCJA) expire before growing back above 6.0 percent of GDP by the end of the decade. By 2035, the deficit will total more than $2.5 trillion (5.8 percent of GDP) – though this figure would be higher were it not for timing shifts that push some payments from 2035 to 2034.

Should policymakers choose to extend the individual and estate provisions from the 2017 Tax Cuts and Jobs Act (TCJA) before they expire at the end of 2025 without further offsets, debt would be much higher. Under this alternative scenario, debt would grow to 129 percent of GDP by 2035. Deficits would be $4.6 trillion larger over the period without further offsets.

Spending and Revenue

Spending and revenue will remain far apart, both growing slightly over the window.

By FY 2035, spending will increase to 24.0 percent of GDP from a projected 23.3 percent of GDP in 2025. Spending growth will be largely driven by spending on programs for health and retirement along with interest on the debt.

Net interest costs are projected to match their record as a share of the economy at 3.2 percent of GDP in 2025 ($952 billion) before rising to a new record in 2026 ($1.0 trillion) and to 4.1 percent of GDP by 2035 ($1.8 trillion). Net interest spending is the second largest line item in the budget behind Social Security, exceeding national defense and Medicare.

By FY 2035, revenue will increase to 18.3 percent of GDP from 17.1 percent of GDP in 2025. Revenue growth over the next decade is largely attributable to the expiration of provisions in the TCJA – individual income tax revenue alone will grow from $2.6 trillion in FY 2025 to $3.0 trillion in FY 2026. With TCJA extension and no further offsets, we estimate that revenue would be about 1.0 percent of GDP lower per year.

Changes in the Budget Outlook

Deficit projections are lower by nearly $1.0 trillion over the FY 2025 to 2034 window relative to CBO’s June 2024 baseline due primarily to economic and technical changes. Debt was projected to reach 122 percent of GDP by 2034 last June, and it is now projected to reach 117 percent of GDP by 2034.

The largest changes to projections stem from economic revisions. CBO estimates that deficits will be $2.5 trillion smaller than previous projections over a decade, largely from higher GDP growth and thus increased individual income tax revenue. The stronger economy will also result in lower spending, particularly for safety net programs.

Technical changes, on the other hand, added nearly $1.3 trillion to projected deficits. This is mainly due to upward revisions in projected enrollment in Medicaid along with downward revisions in estimated tax collection based on weaker-than-expected receipts in 2024.  

Legislative changes were largely offsetting, with increases in projected nondefense discretionary spending stemming from the American Relief Act roughly canceled out by lower base and supplemental defense discretionary projections. Reductions in base defense discretionary projections resulted from the Fiscal Responsibility Act’s (FRA) section 102 caps being invoked because discretionary appropriations have not been completed for 2025. The remaining net increase from legislative changes comes from the enactment of the Social Security Fairness Act, adding about $200 billion to deficits over the period.

The Economic Outlook 

CBO’s economic projections show a slightly improved economy in the near term since its baseline in June 2024. Real GDP is projected to have grown 2.3 percent in calendar year 2024, compared to 2.0 percent projected in June. Real GDP growth is expected to weaken to 1.9 percent in 2025 and stabilize at around 1.7 percent to 1.8 percent from 2026 through 2035.

Unemployment is expected to increase slightly in 2025 and 2026 before leveling off around 4.4 percent.

The Personal Consumption Expenditures (PCE) price index is expected to increase 2.2 percent in 2025, 2.1 percent in 2026, and 2.0 percent in 2027 thereafter.

Interest rates are expected to remain high but stable throughout the decade, with the 10-year Treasury yield averaging 3.9 percent over the next decade and the 3-month Treasury yield averaging 3.2 percent.

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CBO’s latest economic and fiscal projections highlight the need to put debt on a more sustainable path. Debt will reach record levels as a share of the economy by 2029 and reach 118 percent of GDP by 2035. Spending and revenue continue to grow under current law but remain far apart, and this divergence would only worsen if the TCJA is extended without further offsets. Interest spending continues to grow, exceeding defense and Medicare this year and matching its record as a percentage of GDP. Meanwhile, major trust funds will approach insolvency this decade.

With debt growing to record levels, policymakers should not be implementing more deficit-increasing policies. Instead, policymakers should work together on a deficit reduction plan that puts everything on the table and consider a wide array of offsets options that look at both tax and spending policies.