This morning, the Congressional Budget Office (CBO) released an update to its budget and economic outlook for the next decade. In news
that will be shocking to none of my readers, the federal debt is projected to grow over the course of the decade.
Check out their chart below:
By CBO’s estimate, the federal debt held by the public will reach 74 percent of GDP at the end of this fiscal year, a level not seen in the US since the topsy-turvy budgetary days of FDR and WWII. By 2024, the federal debt is projected to reach 77 percent of GDP. Before the onset of the recession, federal debt constituted a “mere” 35 percent of GDP. If current economic trends continue, debt levels that were once rationalized by extraordinary economic circumstances may simply become the new normal.
The CBO is more pessimistic than the Obama administration about GDP growth over the next decade, but they’re probably still more optimistic than a lot of Americans. These projections are assuming improvements in aggregate demand, higher consumer spending, and a turnaround of the housing sector. Should any of these changes fail to materialize, GDP growth may remain below even the CBO’stempered projections, and the debt-to-GDP ratio could be even higher than expected.
Now, here is another alarming aspect of this report: Outlays are growing at an average of 5.2 percent per year, which is greater than nominal GDP growth. This is one of our key problems. We will never get the budget under control with federal spending consistently growing faster than our economy.?
Some commentators have pointed to shrinking short-term deficits as one cause for celebration. I am not so cheerful. While this year’s budget deficit is projected to be $506 billion, which is $170 billion lower than last year’s deficit, it’s still higher than the $492 billion 2014 deficit anticipated in CBO’s projections from April.The discrepancy largely stems from lower-than-anticipated corporate-income-tax receipts.
What’s more, these magically declining budget deficits could easily be reversed by the usual congressional ineptitude. Should a misguided Congress kick the can of sequester cuts down the road again, then deficits could balloon by as much as $900 billion over the next decade. Extending a host of expiring tax subsidies and other abuses of the tax system, at least some of which is expected, would boost deficits by another $900 billion. Additionally, as Wonkblog reports, much of the apparent deficit improvements stem from changes in the way that CBO calculates interest payments on the debt. Even with all of that, the CBO also projects that budget deficits will exceed 3 percent of GDP by 2018 and will continue to grow to almost 4 percent by 2024.
Over at the Cato Institute, Nicole Kaeding highlights some other key points: