CBO's Long-Term Debt Outlook Improved Slightly from Last Year, Here's Why
In its latest Long-Term Budget Outlook, the Congressional Budget Office (CBO) projects debt held by the public will rise from over 78 percent of Gross Domestic Product (GDP) this year to 141 percent of GDP by 2048 under current law. While that amount of debt is certainly troubling – not to mention unprecedented – it's actually an 11 percentage point improvement from last year's outlook, when CBO projected debt would reach 152 percent of GDP by 2048.
However, nearly the entirety of the improvement can be explained by two factors that are unlikely to fully materialize – the assumptions of lower disaster spending and higher tariff revenue. Of the 11 percent of GDP improvement, 8.5 percent comes from lower projected disaster spending and 2.4 percent from higher projected tariff revenue.
|2018 Projection of Debt to GDP in 2048||152%|
|Lower assumed disaster spending||-8.5%|
|Higher tariff revenue||-2.4%|
|Lower Social Security spending||-2.3%|
|Lower health care spending||-1.7%|
|Other primary spending differences||-1.6%|
|Lower revenue (non-tariff)||+11.6%|
|Change in interest rate assumptions||-5.7%|
|Other effects and interactions||-0.4%|
|2019 Projection of Debt to GDP in 2048||141%|
Source: Congressional Budget Office (CBO), CRFB calculations.
Lower disaster spending, which explains roughly three-quarters of the improvement, is the result of a baseline convention that takes total discretionary spending – including disaster funding – for the current fiscal year and inflates it forward. While 2018 was an extremely costly year for disasters ($126 billion in total appropriations) due to Hurricanes Harvey, Irma, and Maria, the combination of fewer natural disasters and the ongoing political stalemate has led to lower appropriations for disasters in 2019 than in previous years.
CBO’s baseline indicates that only $2 billion in disaster relief funding has been spent thus far in 2019, yet Congress has in fact appropriated $21 billion. CBO’s projections therefore assume only 10 percent of total disaster funding for this year has been spent. Future disaster spending is likely to be higher; the federal government has spent an average of $63 billion per year on disaster relief since 2000, and that cost is projected to grow continuously over time.
The remaining quarter of the improvement in projected debt is the result of tariffs President Trump has imposed through Executive Orders, mainly on Chinese imports. CBO estimates these tariffs will raise roughly $377 billion in additional revenue over the next decade, and its long-term projections assume they will continue to generate about 0.2 percent of GDP per year over the long run.
Importantly, though, the Administration has insisted that these tariffs are designed to be temporary and are being used as leverage to secure more favorable trade deals. Should China and the U.S. reach agreement on such a trade deal, the revenue from these tariffs would likely disappear. Alternatively, a future President could repeal the tariffs, thereby reducing projected revenue and increasing projected debt.
To be sure, other factors have also lead CBO to adjust its latest long-term projection relative to last year's, but these factors move in opposite directions and largely cancel each other out.
Most significantly, CBO projects non-tariff revenue (absent the macroeconomic feedback of growing GDP) to be somewhat lower than it previously estimated, resulting in a nearly 12 percent increase in projected debt in 2048. However, CBO also projects lower interest payments (largely due to lower interest rates), health spending, Social Security costs, and other spending – roughly cancelling out the debt impact of the lower revenue estimate.
Overall, the improvements in CBO's latest long-term projections for debt are seemingly temporary and unlikely to fully materialize. Even if they do, debt remains on an unsustainable path. Lawmakers must come to the table and address the situation before it gets worse. This includes reforming the tax code, setting reasonable and responsible discretionary spending levels, curbing the growth of health care spending, making Social Security solvent, and pursuing a combination of other revenue increases and spending cuts to place debt on a downward trajectory.