CBO's Deficit Projections Are Higher, Here's Why
In its updated Budget and Economic Outlook, the Congressional Budget Office (CBO) projected budget deficits will total $15.1 trillion between Fiscal Year (FY) 2021 and 2031, which is $572 higher than its February estimate of $14.5 trillion. All of this increase can be explained by $745 billion of additional borrowing in FY 2021, which lifted this year’s projected deficit from $2.3 trillion to $3.0 trillion. CBO estimates the deficit will total 13.4 percent of Gross Domestic Product (GDP) in FY 2021 and average 4.9 percent of GDP over the 2021 to 2031 period, up from its previous estimate of 4.8 percent of GDP. As a result of higher forecasts of nominal GDP, CBO projects debt to reach 106.4 percent of GDP in FY 2031, slightly below CBO’s prior estimate of 107.2 percent of GDP.
The relatively modest change in CBO’s deficit and debt projections is driven by three largely offsetting factors. On the one hand, the American Rescue Plan (ARP) added over $2.0 trillion to the debt including interest. On the other hand, technical revisions – especially related to expected revenue collections – reduced projected deficits by over $1.4 trillion. Changes in the economic outlook – including higher forecasts of output, inflation, employment, and interest rates – had a minimal effect on projected deficits, though the increase in projected nominal GDP tempered projected increases in deficits and debt as a share of the economy.
Summary of Changes from CBO's February 2021 Baseline
|Nominal Dollars||Percent of GDP|
|Debt in CBO's February 2021 Baseline||$35,304 billion||107.2%|
|Legislative Changes||$2,091 billion||6.3%|
|Economic Changes||-$95 billion||-0.3%|
|Technical Changes||-$1,424 billion||-4.3%|
|Debt/Deficit Differences Due to Credit Programs||-$49 billion||-0.1%|
|Effect of Higher Nominal GDP||n/a||-2.4%|
|Debt in CBO's July 2021 Baseline||$35,827 billion||106.4%|
Source: Congressional Budget Office.
Legislative changes increased the projected deficit for FY 2021 by $1.1 trillion and total deficits by $2.1 trillion over the 2021 to 2031 period due to the enactment of the American Rescue Plan (ARP). The ARP extended or expanded many programs enacted to fight COVID-19, including recovery rebates for most Americans, enhanced unemployment benefits, state and local aid, increased health and education spending, housing assistance, and expanded tax credits. We are tracking disbursements of American Rescue Plan and other COVID relief funds at COVIDMoneyTracker.org.
CBO estimates the ARP will increase projected deficits by $2.091 trillion, the net effect of a $1.775 trillion increase in primary spending, a roughly $53 billion reduction in revenue, and a nearly $264 billion increase in debt service. CBO’s estimate of the American Rescue Plan’s effect is about $32 billion below its original estimate due to several factors. CBO revised down its estimate of spending on unemployment compensation to account for higher forecasts of employment and many states discontinuing extended and expanded benefits before the September 6 deadline. CBO also projects less spending from the Federal Emergency Management Agency’s (FEMA) Disaster Relief Fund and less spending on Medicaid in FY 2021 but higher Medicaid spending in subsequent years.
CBO’s Legislative, Economic, and Technical Changes from February 2021 Baseline
|Deficits Projected in February 2021 Baseline||$2,258 billion||$14,524 billion|
|Legislative Changes||$1,115 billion||$2,091 billion|
|Recovery Rebates ("Economic Impact Payments")||$394 billion||$402 billion|
|State and Local Aid||$284 billion||$362 billion|
|Extended and Enhanced Unemployment Compensation||$144 billion||$153 billion|
|Higher Health Spending for COVID-Related Activities||$26 billion||$111 billion|
|Expanded Child Tax Credit||$20 billion||$92 billion|
|Housing Assistance||$20 billion||$42 billion|
|Higher Education Spending||$12 billion||$166 billion|
|Disaster Relief Fund||<$1 billion||$43 billion|
|Other Spending Changes||$134 billion||$405 billion|
|Lower Individual and Corporate Income Tax Collections||$77 billion||$57 billion|
|Payroll Tax Collections||$3 billion||-$5 billion|
|Debt Service||$2 billion||$264 billion|
|Economic Changes||-$166 billion||-$95 billion|
|Higher Social Security and Health Care Costs||$2 billion||$574 billion|
|Lower Unemployment Insurance Spending||-$13 billion||-$5 billion|
|Higher Discretionary Spending||$0||$145 billion|
|Other Spending Changes||-$5 billion||$58 billion|
|Higher Individual and Corporate Income Tax Collections||-$146 billion||-$1,131 billion|
|Higher Payroll Tax Collections||-$25 billion||-$403 billion|
|Other Revenue Changes||-$2 billion||-$81 billion|
|Effect of Higher Interest Rates and Inflation on Debt Service||$23 billion||$788 billion|
|Debt Service||$0||-$41 billion|
|Technical Changes||-$204 billion||-$1,424 billion|
|Social Security and Health Care Costs||$6 billion||-$244 billion|
|Higher Student Loan Program Spending||$99 billion||$108 billion|
|Credit Program Revisions||-$51 billion||-$51 billion|
|Lower Discretionary Spending||-$16 billion||-$57 billion|
|Other Spending Changes||-$3 billion||$47 billion|
|Higher Individual and Corporate Income Tax Collections||-$258 billion||-$1,132 billion|
|Payroll Tax Collections||$2 billion||-$21 billion|
|Other Revenue Changes||$14 billion||$39 billion|
|Effect of Higher Interest Rates on Debt Service||$4 billion||$38 billion|
|Debt Service||$0||-$150 billion|
|Total Change in Deficits||$745 billion||$572 billion|
|Deficits Projected in July 2021 Baseline||$3,003 billion||$15,096 billion|
Source: Congressional Budget Office. Numbers may not sum due to rounding.
Though CBO substantially revised upward its economic projections, these changes had little net effect on the budget outlook. While forecasts of stronger economic growth and inflation increased CBO’s estimate of revenue collections, estimates of higher economic growth, inflation, and interest rates increased its projection of total spending as well. Overall, economic changes decreased the projected deficit for FY 2021 by $166 billion and increased deficits by $71 billion over the subsequent decade for a net deficit decrease of $95 billion over the 2021-2031 period.
CBO projects real GDP growth of 6.7 percent in calendar year (CY) 2021 and an average of 1.8 percent per year over the subsequent decade, compared to 4.6 percent and 2.0 percent, respectively, in its February economic forecast. Inflation, as measured by the Consumer Price Index (CPI) is estimated to grow by 3.3 percent in CY 2021 and by an average of 2.4 percent per year over the subsequent decade. This is higher than CBO’s February forecast of 1.9 percent CPI growth in CY 2021 and average growth of 2.3 percent per year over the subsequent decade. Meanwhile, the interest rate on ten-year bonds is expected to average 1.6 percent in CY 2021 and 2.8 percent over the subsequent decade, which is above CBO’s prior forecast of 1.1 percent and 2.5 percent, respectively.
As a result, CBO estimated total revenue collections will be $173 billion higher in FY 2021 and $1.6 trillion higher over the 2021-2031 period. Higher wages and salaries will boost individual income and payroll tax revenue by $128 billion in FY 2021 and by $1.3 trillion between 2021 and 2031. Meanwhile, higher corporate profits will boost corporate income tax collections by $42 billion this year and by $281 billion between FY 2021 and 2031. CBO also projects more revenue from Federal Reserve remittances due to higher projected medium- and long-term interest rates and more receipts from estate and gift taxes, customs duties, and excise taxes in response to higher projections of economic growth, asset values, imports, and consumption of taxable fuels.
Partially offsetting these effects are increases in estimates of primary spending and debt service. CBO projects economic changes will decrease primary spending by $16 billion in FY 2021 but increase it by $1.1 trillion between 2021 and 2031 while debt service (including the effects of higher interest rates and inflation) will be $23 billion higher this year and $747 billion more between FY 2021 and 2031. Higher projected inflation and wage growth has led CBO to boost its estimate of Social Security and health care costs by $574 billion through FY 2031, while higher inflation led CBO to project $145 billion more of discretionary spending. Projections of other spending (for example, unemployment benefits) were mostly revised downward in the near-term due to a stronger recovery but upward in future years.
Additionally, CBO expects that higher nominal interest rates - driven by higher real rates and more inflation - will increase spending by $788 billion through 2031. Because revenue revisions are slightly larger than spending revisions, CBO also projects $41 billion less of debt service as a result of economic changes.
Offsetting much of the projected deficit increases from legislative changes are technical changes. Overall, technical changes decreased the projected deficit for FY 2021 by $204 billion and by $1.4 trillion from 2021-2031.
Total revenue will be $243 billion higher in FY 2021 and $1.1 trillion higher over the 2021-2031 period due to technical changes. CBO increased its estimate of individual and corporate income tax receipts by $1.1 trillion to reflect higher-than-anticipated tax collections. CBO’s estimate of total payroll tax revenue is $21 billion higher to account for an updated method of projecting tax-preferred employee contributions for health insurance. CBO estimates lower revenue from Federal Reserve remittances due to lower-than-expected payments so far this year while and less collective receipts from estate and gift taxes, customs duties, and excise taxes.
On the spending side, CBO lowered its estimate of Social Security caseloads and now estimates that the COVID-19 pandemic will have a smaller effect on new Social Security claims. CBO also expects less spending on the Medicare Advantage (MA) program in FY 2021 and in future years, though this is partially offset by lower offsetting receipts for Medicare and a shift in projected enrollees from Medicare’s fee-for-service program to MA (MA is more expensive than fee-for-service on average). Projected spending on premium tax credits increased due to higher estimates of marketplace enrollment and near-term Medicaid spending increased because actual spending in 2021 is higher than anticipated. Medicaid spending will decrease in later years due to lower projected Supplemental Security Income (SSI) caseloads and therefore lower Medicaid enrollment.
Projected spending on student loan programs is higher because of revisions the Department of Education made to the estimated subsidy costs of outstanding loans made before 2021. However, changes the Biden Administration made to the subsidy cost of loans and loan guarantees issued before 2021 is expected to reduce spending on other federal credit programs. CBO lowered its estimate of total discretionary spending to reflect the rate at which funding for various discretionary programs has been spent out. Spending on other programs – including unemployment compensation, the Supplemental Nutrition Assistance Program (SNAP), SSI, and veterans’ benefits and services – will increase due to a variety of technical changes.
Technical changes to CBO’s revenue and primary spending projections decreased the agency’s estimate of debt service by $112 billion, the net effect of a $150 billion decrease in debt service and a $38 billion increase in net interest from an increase in CBO’s forecast of the share of longer-term bonds in Treasury’s portfolio.
Overall, the country's fiscal outlook has changed relatively little from February. While deficits and debt are projected to be higher, nominal GDP is also expected to be larger, and thus debt-to-GDP will be similar.
As before, debt continues to hurdle toward record levels and remains on an unsustainable long-term path. Policymakers should respond with policies that slow the growth of the debt over the long-term, not worsen it.