Today, CBO released The 2019 Long-Term Budget Outlook. In that report, we present what we call our extended baseline projections—which are projections of federal spending, revenues, deficits, and debt for the next 30 years under a set of standard assumptions. Those assumptions are that current laws generally do not change but also that Social Security and Medicare benefits are paid in full even if there are insufficient resources in the trust funds associated with each program.
CBO’s Projections of Federal Debt
In our extended baseline projections, budget deficits drive federal debt held by the public to unprecedented levels. Debt rises from 78 percent of gross domestic product (GDP) in 2019, which is already high by historical standards, to 144 percent by 2049. Our projections of debt, which are slightly lower than last year’s, incorporate our central estimates of various factors, such as productivity growth and interest rates on federal debt.
Those projections of federal debt are sensitive to changes in the factors underlying them. For example, if the growth of total factor productivity in the nonfarm business sector was one-half of one percentage point higher each year than we project, all else being equal, debt in 2049 would equal 106 percent of GDP; if such growth was one-half of one percentage point lower, debt that year would equal 185 percent of GDP. If interest rates were one percentage point lower each year than we project, debt in 2049 would equal 107 percent of GDP; if they were one percentage point higher, debt that year would equal 199 percent of GDP.
The upshot is that even if productivity growth or interest rates differed in meaningful ways from our projections in the direction that would tend to reduce deficits, debt several decades from now would probably be much higher than it is today if current laws generally did not change.
Those outcomes can be greatly affected by future decisions about fiscal policy. If, instead of maintaining current law, lawmakers enacted legislation to maintain certain major policies now in place—most significantly, if they prevented a cut in discretionary spending in 2020 and an increase in individual income taxes in 2026—then debt held by the public would increase even more, reaching 219 percent of GDP by 2049. In the opposite direction, if Social Security benefits were limited to the amounts payable from revenues received by the Social Security trust funds (starting in 2033, when the balances in those funds are projected to be exhausted), debt in 2049 would reach 106 percent of GDP, still well above its current level.
Key Elements of the Projections
Higher interest costs are a major contributor to the large deficits that we project—the result of a substantial increase in federal borrowing, along with higher interest rates over the long term. We project that net outlays for interest would more than triple in relation to the size of the economy over the next three decades, exceeding all discretionary spending by 2046.
Another significant contributor to the projected deficits is greater spending for Social Security owing to the aging of the population and greater spending for the major health care programs (primarily Medicare), reflecting both aging of the population and rising health care costs per person.
Like spending, revenues would rise in relation to GDP under current law. Increases in receipts from individual income taxes account for most of the projected growth, partly because certain provisions of the 2017 tax act are scheduled to expire in 2026 and partly because an increasing share of income would be pushed into higher tax brackets. Nevertheless, revenues would not keep pace with growth in spending.
As a result, we project that deficits would increase from 4.2 percent of GDP in 2019 to 4.5 percent by 2029 (a projection that we have adjusted to exclude the effects of shifts in the timing of certain payments), 6.8 percent by 2039, and 8.7 percent by 2049. The average deficit over the past 50 years was 2.9 percent of GDP. The prospect of such large deficits over many years, and the high and rising debt that would result, poses substantial risks for the nation and presents policymakers with significant challenges.
About the Report
When I assumed my new role as CBO’s Director on June 3, the agency was in the process of preparing this report. As I immersed myself in it, I was conscious of how CBO’s founding Director, Alice Rivlin, had the vision, wisdom, and determination to establish procedures and standards that have guided the agency’s nonpartisan analysis for more than four decades. I was also very conscious of how many people, inside and outside government, rely on our analysis for important information about the nation’s budget—including people who have been teachers and mentors for me and many others. I thought particularly of the distinguished economist Martin Feldstein, who passed away two weeks ago after a career that encompassed academia and public service at the highest levels. Dr. Feldstein had focused throughout his career on the long-term budget outlook—including in his last public writing, on March 20 of this year. Today’s report provides the type of objective, impartial analysis that he valued and that CBO strives to produce in support of the Congress as it grapples with the budgetary and economic issues facing the nation.
Phillip L. Swagel is CBO’s Director.