CRFB Analyzes CBO’s Updated Budget and Economic Forecast
Moments ago, CRFB published a new 6-page paper summarizing CBO’s latest Budget and Economic Outlook. Under its current law baseline, CBO estimates that federal debt held by the public will reach 74 percent of GDP by the end of 2014 – a post-war record and more than twice the level at the end of 2007. Debt will fall slightly to below 73 percent by 2018 but, beyond that, CBO’s forecasts show that debt levels will resume their upward trend, reaching 77.2 percent of GDP in 2024.
This growing debt is largely the result of a projected rise in spending levels not matched by equivalent increases in revenue. While CBO forecasts revenue to remain roughly stable as a share of GDP, at about 18 percent, spending will increase from 20.4 percent of GDP in 2014 to 21.8 percent in 2024. As we explain in our paper:
Much of this increase is due to the growth in the entitlement programs resulting from health care cost growth, population aging, and the coverage expansion under the Affordable Care Act. Social Security will grow from 4.9 percent of GDP in 2014 to 5.6 percent by 2024. Meanwhile, federal health spending will grow from 4.9 percent of GDP to 5.9 percent by 2024. The fastest growing portion of the budget, however, is interest payments; they will rise precipitously as a result of rising interest rates and growing debt levels. Net interest costs are projected to double between 2014 and 2021 -- from 1.3 percent of GDP in 2014 to 2.7 – and grow to 3 percent of GDP by 2024.
Overall, health care programs, Social Security, and interest spending will account for a striking 85 percent of the increase in spending over the next decade.
The paper also shows how the projections have changed since CBO's last update in April. Deficits are about $400 billion lower through 2024, and debt will be about one percentage point of GDP lower in 2024 than previously expected (77.2 percent versus 78 percent). Much of this drop is due to lower interest rates, which reduce the federal government's interest burden by $465 billion.
Despite the slight improvement since April, CBO expects that the increasing debt levels will slow long-term economic growth, constrain policy-makers' ability to respond to unexpected challenges, and increase the risk of a fiscal crisis in the future. Their latest projections underscore the need for quick action to put the debt on a more sustainable path.