CBO Shows Deteriorating Budget and Economic Projections
The Super Bowl was held last Sunday, and the Olympics are coming up in a few days, but the biggest event this week happened today as CBO released its latest budget and economic projections for the next ten years. The odd scheduling of budget projection releases last year meant that there was no August update of the baseline, as there usually is, so these are the first projections in almost nine months. CBO's projections show a significantly worse outlook than their previous one did, with debt as a percent of GDP only reaching a low of 72 percent of GDP in 2017 and rising as a percent of GDP from 2018 onward to more than 79 percent by 2024 — much higher than their previous projection of 71 percent of GDP in 2023. These updated projections should serve as a warning that budget projections can change signifcantly in light of new data — especially new data on the economy.
In total, deficits are $7.9 trillion (3.5 percent of GDP) over the 2015-2024 period, compared to $6.3 trillion (2.9 percent of GDP) over the 2014-2023 period from last May's baseline. Debt falls from 73.6 percent of GDP in 2014 to a low of 72.3 percent by 2017 before rising to 79 percent by 2024. Throughout the ten-year period, debt would remain at elevated levels not seen since the aftermath of World War II. But even more worrisome is the clear upward path of debt this decade, compared to a more stable outlook in the previous projections.
Debt as a percent of GDP surpasses the 2014 level by 2020, whereas it did not surpass the 2014 level until after 2023 in the May 2013 baseline.
CBO warns about the high economic price of growing debt:
The large budget deficits recorded in recent years have substantially increased federal debt, and the amount of debt relative to the size of the economy is now very high by historical standards….. Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt).
Spending is gradually rising throughout the next ten years from 20.5 percent of GDP in 2014 to 21.4 percent in 2019 and 22.4 percent by 2024. This is due to several factors, including the gradual easing of downward pressure on spending from several near-term spending contraints, growing health care costs, the continued retirement of the Baby Boomers, and rising interest payments on a growing stock of debt. Meanwhile, revenue remains at around 18 percent of GDP, shrinking slightly in the near term as revenue from the Federal Reserve wanes and rising later on as income tax revenue grows and revenue measures from the health care law and fiscal cliff deal remain in place.
In short, the budget outlook has deteriorated from previous projections, mostly on the basis of CBO revising projections for economic growth, inflation, and the labor force.
Stay tuned to The Bottom Line throughout today and the rest of this week. We will have much more analysis of the report and how it differs from the May 2013 baseline.
Note: The graphs have been changed to show May 2013 current law numbers, rather than those numbers with an adjustment to remove extrapolated Sandy relief funding.