CBO Updates The Baseline Ahead of President's Budget Estimate

In advance of its scheduled release of an analysis of the President's budget, the Congressional Budget Office (CBO) has updated its budget projections through 2026. Their new estimate shows a very similar picture to their last baseline in January: essentially unchanging debt as a share of Gross Domestic Product (GDP) in the near term but rising debt after that, with $1 trillion deficits still returning by 2022. This blog goes into further detail about CBO's March budget projections and what has changed since January.

Over the next ten years, deficits are projected to total $9.3 trillion, or 4.0 percent of GDP. Deficits will rise nearly every year in dollar terms over this time period. The deficit will stay around 2.9 percent of GDP through 2018 but rise steadily to 4.9 percent by 2026. These widening deficits drive the rapid rise in debt after 2018, when it increases from 75.4 percent in 2018 to 85.6 percent by 2026. The previous projection had debt reaching 86.1 percent in 2026.

Driving the rise in debt over the next decade is rising spending coupled with stagnant revenue. Spending is projected to rise from 21.1 percent of GDP in 2016 to 23.1 percent by 2026, driven entirely by increases in Social Security, health care, and interest spending. At the same time, though, revenue will essentially be flat, falling slightly from 18.2 percent in 2016 to 18.0 percent in 2019 and back up to 18.2 percent in 2026, as growing individual income tax revenue is largely offset by falling corporate revenue and Federal Reserve remittances. Spending and revenue average 22.1 and 18.1 percent of GDP, respectively, over the next ten years, similar to their totals in the January baseline.

The revisions to the CBO baseline, which lower deficits by $105 billion through 2026, include $169 billion of lower deficits from economic changes and $64 billion of higher deficits from technical changes. The biggest revision comes from economic revisions to revenue, totaling $135 billion through 2026, as CBO incorporated the changes in its economic forecast as a result of last December's tax deal and other developments into their revenue numbers. The second largest revision comes from interest spending, which is expected to be $74 billion higher as a result of higher expected interest rates across Treasury securities and a different mix of securities issued that leads to higher average rates.

Other major revisions include: $50 billion of lower Medicaid spending due to lower-than-expected spending so far this year and a database error in the January baseline; $28 billion of higher spending on student loans due to increases in the use of income-based repayment plans and higher administrative costs; and about $10 billion of higher Social Security spending, the net effect of lower cost-of-living adjustments and an older-than-expected Social Security population.

In addition, CBO shows $79 billion of lower spending on the health exchange subsidies and $68 billion of lower revenue from technical changes; however, both of these are mostly the result of $67 billion less (for 2017-2026) in spending and revenue collections for the exchange's risk adjustment. Those changes exactly offset each other.

Thus, in advance of the re-estimate of the President's budget, CBO's budget projections still show an unsustainable debt path that policymakers will have to correct. We will see next week how much of an improvement the President's plan would make.