On August 23, CBO released its most recent budget and economic projections. Because the Congress was out of session at that time, we thought we’d review those budget projections today. (Earlier, our colleagues reviewed the economic projections.)
In fiscal year 2016, the federal budget deficit will increase in relation to economic output for the first time since 2009, the Congressional Budget Office estimates. If current laws generally remained unchanged—an assumption underlying CBO’s baseline projections—deficits would continue to mount over the next 10 years, and debt held by the public would rise from its already high level.
CBO’s estimate of the deficit for 2016 has increased by $56 billion since the agency issued its previous estimates in March, primarily because revenues are now expected to be lower than earlier anticipated. In contrast, the cumulative deficit through 2026 is smaller in CBO’s current baseline projections than the shortfall projected in March, chiefly because the agency now projects lower interest rates and thus lower outlays for interest payments on federal debt. Nevertheless, by 2026, the deficit is projected to be considerably larger relative to gross domestic product (GDP) than its average over the past 50 years.
The Budget Deficit for 2016 Will Be About One-Third Larger Than Last Year’s
CBO now estimates that the 2016 deficit will total $590 billion, or 3.2 percent of GDP, exceeding last year’s deficit by $152 billion (see the table). About $41 billion of that increase results from a shift in the timing of some payments that the government would ordinarily have made in fiscal year 2017; those payments will instead be made in fiscal year 2016 because October 1, 2016 (the first day of fiscal year 2017), falls on a weekend. If not for that shift, the projected deficit in 2016 would be $549 billion, or 3.0 percent of GDP—still considerably higher than the deficit recorded for 2015, which was 2.5 percent of GDP.
The deficit is growing in 2016 because revenues are up only slightly, by less than 1 percent ($26 billion), whereas outlays are projected to rise by 5 percent ($178 billion). As a share of GDP, total revenues are expected to fall from 18.2 percent to 17.8 percent. In contrast, outlays are projected to rise to 21.1 percent of GDP, up from 20.7 percent last year. That increase is the result of the following: a 6 percent rise, in nominal terms, in mandatory spending for programs such as Social Security and Medicare (which is generally governed by statutory criteria); a 1 percent increase in discretionary outlays (which stem from annual appropriations); and an 11 percent jump in net interest outlays.1 Debt held by the public will amount to nearly 77 percent of GDP by the end of 2016, CBO estimates—3 percentage points higher than last year and its highest ratio since 1950.
Growing Deficits Projected Through 2026 Would Drive Up Debt
In CBO’s baseline projections, the budget deficit is generally on an upward trend over the next decade, reaching 4.6 percent of GDP in 2026. A slight decline in the deficit over the next two years is largely explained by the shift in the timing of payments from one fiscal year to another because certain scheduled payments fall on weekends. In later years, continued growth in spending—particularly for Social Security, Medicare, and net interest—would outstrip growth in revenues, resulting in larger deficits and increasing debt.
Outlays
In CBO’s projections, annual federal outlays rise by $2.4 trillion (or about 60 percent) from 2016 to 2026. Relative to the size of the economy, outlays remain near 21 percent of GDP for the next few years—higher than their average of 20.2 percent over the past 50 years. Later in the coming decade, the growth in outlays would exceed growth in the economy, and by 2026, outlays would rise to 23.1 percent of GDP. That increase reflects significant growth in mandatory spending and interest payments, offset somewhat by a decline, in relation to the size of the economy, in discretionary spending. More specifically:
- Outlays for mandatory programs are projected to rise by close to 70 percent in nominal terms from 2016 to 2026, increasing as a percentage of GDP by almost 2 percentage points over that period. That increase is mainly attributable to the aging of the population and rising health care costs per person, which substantially boost projected spending for Social Security and Medicare.
- Because of rising interest rates and, to a lesser extent, growing federal debt, the government’s interest payments on that debt are projected to rise sharply over the next 10 years—nearly tripling in nominal terms and almost doubling relative to GDP.
- In contrast, discretionary spending is projected to rise by a much smaller amount in nominal terms, consequently dropping to a smaller percentage of GDP than in any year since 1962 (the first year for which comparable data are available).
Revenues
If current laws generally remained unchanged, revenues would gradually rise—by $1.7 trillion, or about 50 percent, from 2016 to 2026—increasing from 17.8 percent of GDP in 2016 to 18.5 percent by 2026. They have averaged 17.4 percent of GDP over the past 50 years.
Only revenues from individual income taxes would grow faster than the economy. In CBO’s baseline, with revenues from each source measured as a percentage of GDP:
- Receipts from individual income taxes increase each year—for a total rise of 1.3 percentage points over the 10-year period—because of real bracket creep (the process in which, as income rises faster than prices, an ever-larger proportion of income becomes subject to higher tax rates), rising distributions from tax-deferred retirement accounts, an increase in the share of wages and salaries earned by higher-income taxpayers, and other factors.
- Remittances from the Federal Reserve, which have been unusually high since 2010, return to more typical levels, dropping by 0.4 percentage points from 2016 to 2026.
- Payroll tax receipts decline by 0.2 percentage points over the next decade, primarily because of the expected increase in the share of wages going to higher-income taxpayers.
- Corporate income tax receipts change little over the 10-year period.
Debt Held by the Public
As deficits accumulate in CBO’s baseline, debt held by the public rises from 77 percent of GDP ($14 trillion) at the end of 2016 to 86 percent of GDP ($23 trillion) by 2026. At that level, debt held by the public, measured as a percentage of GDP, would be more than twice the average over the past five decades. Beyond the 10 year period, if current laws remained in place, the pressures that contributed to rising deficits during the baseline period would accelerate and push up debt even more sharply. Three decades from now, for instance, debt held by the public is projected to be about twice as high, relative to GDP, as it is this year—which would be higher than the United States has ever recorded. (For additional discussion, see the The 2016 Long-Term Budget Outlook.)
Such high and rising debt would have serious negative consequences for the budget and the nation:
- Federal spending on interest payments would increase substantially as a result of increases in interest rates, such as those projected to occur over the next few years.
- Because federal borrowing reduces total saving in the economy, the nation’s capital stock would ultimately be smaller, and productivity and total wages would be lower.
- Lawmakers would have less flexibility to use tax and spending policies to respond to unexpected challenges.
- The likelihood of a fiscal crisis in the United States would increase. There would be a greater risk that investors would become unwilling to finance the government’s borrowing needs unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.
1. About $37 billion of the increase in mandatory spending and $4 billion of the increase in discretionary spending result from the timing shift mentioned above. If not for that shift, total outlays would rise by 4 percent this year (and equal 20.8 percent of GDP); mandatory spending would rise by 4 percent, and discretionary spending by 1 percent.
Christina Hawley Anthony and Barry Blom are analysts in CBO’s Budget Analysis Division.