The Congressional Budget Office published this week its annual Long-Term Budget Outlook presenting its projections of what federal deficits, debt, spending, and revenues would be for the next 30 years if current laws governing taxes and spending generally did not change. In CBO’s projections, Primary deficits are projected to be 14.4% of GDP in 2020 and to average 3.6% of GDP from 2021 to 2030— 1.9 percentage points more than in last year’s projections — and continue to increase thereafter from 3.4 percent of GDP in 2031 to 4.5 percent in 2049. — 1.4 percentage points and 1.5 percentage points greater, respectively, than they were last year. As a result, total deficits are projected to increase from 5% of gross GDP in 2030 to 13% by 2050 in large part as a result of massive spending for interest on debt (cf. chart below). The latter is now set to equal 7.9% of GDP in 2049 (of which 2 percentage points is related to the net additional interest spending related to the 2020 additional debt which more than offsets the effect of lower interest rates projected over a decades-long period (cf. chart below).
The projected budget deficits would boost federal debt to 104% of GDP in 2021, to 107% of GDP – the highest in US history – in 2023, and to a whopping 195% of GDP by 2050 – 45 percentage points higher than the agency projected in its previous long-term budget outlook. The economic disruption caused by the COVID-19 pandemic and the federal government’s response to it (the Paycheck Protection Program, the expansion of unemployment compensation, the recovery rebates, …) contribute significantly to that difference. However, the increase in fiscal deficits and federal debt is also related to muted inflation expectations over the 2020-2030 period and to a slowdown in real potential GDP growth that is driven by factors unrelated to the pandemic, such as the slower growth of the labour force and the somewhat reduced growth of TFP. This comes atop structural determinants of federal expenditure related to population ageing which would translate inter allia into a strong expected increase of healthcare spending over the next thirty years (+7 percentage points of GDP over the 2019-2049 period), while fiscal revenues are projected to increase at a much lower rate (+2 percentage points of GDP over the 2019-2049 period).
How to read these figures ?
The CBO’s updated 2020 long-term budget outlook is based on its July 2020 economic outlook which assumes that output will remain lower and unemployment will remain higher for longer than in the updated Federal Reserve economic projections following the latest FOMC meeting on September 16, which take into account the stronger than expected recovery of the US job market in Q3 (cf. our discussion on this subject in The Multipolarity Letter n°14). In addition, CBO’s projections assume that current laws remain unchanged and that no significant additional emergency funding is provided. These projections are sensitive to key economic assumptions regarding business productivity and interest rates. If productivity grows 0.5 percentage points faster than CBO projects, federal debt held by the public would be 155% of GDP in 2050 rather than 195% of GDP. In addition, if federal borrowing rates are 1.0 percentage point higher than CBO projects, federal debt held by the public reach 264% GDP in 2050 rather than the 195% of GDP in the extended baseline projection. Alternatively, if federal borrowing rates were 1.0 percentage point lower than in CBO’s extended baseline projections, federal debt held by the public would be 149% of GDP in 2050.