CRFB Analyzes the CBO Long-Term Outlook
CBO's Long-Term Budget Outlook is a long and detailed 140-page document – filled to the brim with facts, figures, scenarios and assumptions – and comes with a spreadsheet with even more data. To help people navigate the report and pull out its key takeaways, we've boiled down the document into a concise 6-page analysis with all the key facts and findings. CBO's debt projections have changed only slightly since last year – with a deterioration over the next three decades and a modest improvement thereafter – so the fiscal outlook remains unsustainable by any measure.
As we explain in our paper, CBO projects deficit and debt levels to remain fairly stable over the next few years, but then rise dramatically. Under CBO's "Extended Baseline Scenario," which generally reflects current law, deficits will rise from about 3 percent of GDP over the next several years, to 4 percent by 2025, 6.5 percent by 2040, and nearly 12 percent by 2085. As we explain, this will have major implications for debt:
As a result of these deficits, public debt will continue to accumulate. Already above its post-World War II record, CBO projects debt held by the public to grow from 74 percent of GDP in 2014 to 80 percent by 2025, 108 percent by 2040, 147 percent by 2060, and 212 percent by 2085. These debt levels would be unprecedented, and as CBO warns, “Beyond the next 25 years, the pressures caused by rising budget deficits and debt would become even greater unless laws governing taxes and spending were changed. With deficits as big as the ones that CBO projects, federal debt would be growing faster than GDP, a path that would ultimately be unsustainable."
This rising debt is largely the result of increases in health and retirement spending, which are outpacing revenue growth. Health spending is projected to rise from 4.8 percent this year to 6.1 percent in 2025, 8.1 percent by 2040, 10.3 percent by 2060, and 13.4 percent by 2085. Social Security spending will also rise -- though not as quickly or as high -- from 4.9 percent of GDP today to 5.7 percent in 2025, 6.3 percent in 2040, 6.4 percent in 2060 and 6.8 percent in 2085. And because revenue will not rise fast enough to match this growth, interest costs will balloon.
Fiscal Projections under CBO's Long-Term Scenarios (% of GDP)
|Extended Baseline Scenario|
|Alternative Fiscal Scenario*|
*2060 and 2085 are rough CRFB extrapolations
CBO also publishes an Alternative Fiscal Scenario (AFS), which assumes policymakers will increase spending and reduce taxes compared to current law. This shows a much steeper climb in debt, which reaches 170 percent of GDP by 2040 and by our calculations 330 percent by 2060 and 620 percent by 2085.
Incorporating the negative economic impact of debt would further worsen the situation. CBO estimates that real GNP would be reduced by 3 percent in 2039 under the Extended Baseline and by another 5 percent beyond that under the AFS compared to a scenario where lawmakers kept debt under control.
The report explains the real economic consequences of failing to address the mounting debt, as well as the benefits of acting sooner rather than later. As we conclude in the paper:
Simply not digging our budget holes deeper will not be nearly good enough to solve the debt issue, though it would at least represent a start. Rather, policymakers will have to make tough choices in reforming entitlements and the tax code to close the gap between spending and revenue. Although it will be difficult, acting sooner will make the adjustments less painful than waiting for debt to rise.
See our paper for a more detailed discussion of these issues, including the drivers of long-term debt and deficit projections, CBO scenario assumptions, the exhaustion dates of Social Security and Medicare trust funds and the economic effects of growing debt and deficit reduction.