CBO’s New Report Shows Worsening Fiscal Outlook

Today, the Congressional Budget Office (CBO) updated its budget and economic projections, emphasizing a fact that we’ve known for some time: the United States is on an unsustainable fiscal course marked by rising deficits. A key part of the challenging outlook is that rising debt and higher interest rates have pushed up interest payments, which threatens to crowd out other priorities. And it’s critical that we act soon, because the Social Security and Medicare trust funds will both be depleted within a decade or shortly thereafter, which would result in automatic cuts to beneficiaries and in payments to healthcare providers.

Below are some key takeaways from the report:

1. The national debt is expected to exceed its record high in just 3 years.

Debt held by the public was 97 percent of gross domestic product (GDP) at the end of fiscal year 2023. However, by 2027, the structural mismatch between spending and revenues, along with higher interest payments, will cause federal debt to rise above the nation’s all-time high of 106.1 percent, which was reached just after World War II. CBO projects that debt will continue rising, reaching 122 percent of GDP by 2034.



2. Deficits will remain high over the 10-year period.

CBO projects that the annual budget deficit will rise over the next 10 years, climbing from $1.9 trillion in 2024 to $2.9 trillion in 2034 — with spending exceeding revenues by more than one-third in that year. Relative to the size of the economy, CBO projects that if current laws remain the same the nation’s budgetary shortfall will remain high over the coming years — dropping from 6.7 percent of GDP in 2024 to 5.5 percent in 2027, before climbing to 6.9 percent in 2034.



3. Short- and long-term interest rates are expected to decrease by the end of the decade.

To address high inflation, the Federal Reserve has increased the Federal Funds rate to between 5.25 and 5.5 percent; as a result, the rate on 3-month Treasury bills rose substantially over the past two years. CBO expects that rate to remain stable at 5.2 percent in calendar year 2024 before eventually dropping to 2.8 percent in 2028. Afterwards, the short-term rate is anticipated to be steady through the remainder of the decade. CBO expects that the 10-year Treasury rate will average 4.5 percent this year, up from 3.0 percent a couple years ago. The agency projects that such rates will fall to 3.6 percent by 2027 and then gradually rise to 4.1 percent in 2032, where it will remain through the remainder of the projection period.



4. Interest costs have spiked.

Higher short-term and longer-term interest rates substantially pushed interest costs up since 2021. CBO expects that interest costs will be more than twice as high this year as they were just three years ago — rising from $352 billion in 2021 to $892 in 2024. Going forward, interest payments are projected to grow further and reach $1.7 trillion in 2034. Relative to the size of the economy, net interest reached a high of 3.2 percent in 1991; in CBO’s projections, that ratio would be exceeded next year.



5. Social Security and Medicare are key factors in spending growth.

Driven by an aging population and rising healthcare costs, federal spending on major healthcare programs (Medicare, Medicaid, premium tax credits and related spending, and the Children’s Health Insurance Program) would increase from 5.6 percent of GDP in 2024 to 6.8 percent in 2034. Spending for Social Security will also rise over that period, from 5.1 percent of GDP in 2024 to 6.0 percent in 2034.



6. The major trust funds are expected to be depleted within the next decade or shortly thereafter.

CBO projects that the balance of Social Security’s Old-Age and Survivors’ Insurance (OASI) Trust Fund will be depleted in 2033. In addition, CBO’s numbers indicate that Medicare’s Hospital Insurance (HI) Trust Fund will be depleted shortly after the projection window. At the time of depletion for each trust fund, the corresponding program will be unable to pay its full obligations. The Highway Trust Fund is projected to be depleted in 2028.



7. Revenues won’t keep pace with the growth in outlays.

Relative to the size of the economy, federal revenues are projected to dip next year, from 17.2 percent of GDP in 2024 to 17.0 percent in 2025. CBO anticipates that such receipts will stabilize at nearly 18 percent of GDP from 2026 to 2034, which will not be sufficient to cover the growth in outlays over the period. Additionally, CBO’s projections assume that certain individual income tax provisions of the 2017 tax law that are set to expire at the end of 2025 will actually expire. To the degree that lawmakers extend any of these provisions without offsets, our fiscal situation will be that much worse.



8. The fiscal outlook has worsened over the past four months.

In February 2024, CBO projected that federal deficits over the 2025 to 2034 period would total $20 trillion. In the latest report, CBO projects that cumulative deficits will total $22.1 trillion over the next 10 years — 10 percent higher than their projections four months ago. Most of the higher projected deficits result from additional appropriations provided since CBO’s previous report; much of that spending stems from supplemental funding to provide aid to Ukraine, Israel, and other countries. Additionally, deficits are projected to be larger over the decade due to technical revisions that reduced projected receipts of corporate income taxes and boosted projections for certain healthcare programs (the deficit for this year will also be substantially higher as a result of actions to forgive student loans or reduce such payments). Partially offsetting those elements were a number of economic changes that increased the agency’s projection of federal revenues.

CBO’s report once again shows that America’s fiscal trajectory is on an unsustainable path. The structural mismatch between federal spending and revenues, along with the recent rise in interest rates and therefore federal borrowing costs, will pose challenges for the federal budget, our economy, and the nation’s future if left unaddressed.

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