CBO Budget Projections Worsen at Alarming Rate

The CBO projects trillion dollar deficits by 2020 and 2 trillion by 2028.

Long History of Growing Debt

When CBO published its mid-2017 update, the projections were far from rosy. The combination of the baby boomers phasing into retirement and ever rising health care costs have produced a systemic imbalance between the federal government’s spending and revenues. The Great Recession, military conflicts overseas, prior tax cuts, and other policy changes have also contributed to the steadily rising national debt.

Even before recent policy actions, CBO estimated last June that deficits would exceed $1 trillion by Fiscal Year (FY) 2022. Now, that infamous milestone is expected to be crossed in FY2020 (and could happen as early as next year, for which CBO’s deficit projection clocks in at $981 billion).

Since the Budget Control Act of 2011, CBO’s baseline debt projections have been trending up, but the latest estimates are notably worse. At 96 percent of gross domestic product (GDP), debt held by the public is projected to be nearly the size of the whole economy in 2028, which astoundingly is close to 40 percentage points higher than CBO’s 2012 projection for the same year.

The most troubling news is that this is the conservative picture of where the United States is headed. CBO attributes the increase in this year’s debt projections to a few main factors: The Tax Cut and Jobs Act, the Bipartisan Budget Act of 2018, and increasing interest payments on the federal debt. Should the tax cuts and spending increases be extended, CBO’s alternative (and more realistic) fiscal scenario shows that debt would exceed the size of the economy in 2028 (105 percent of GDP), with deficits crossing the $2 trillion watermark in the same year. If this scenario plays out, interest payments at that point would consume 32 percent of all income tax revenue, meaning nearly one in every three dollars Americans pay in income taxes would be used solely to service outstanding debt.

Deficits Reach $2 Trillion by 2028

Why Debt Matters: How Growing Debt Limits Future Options

First, rapidly expanding debt will depress economic growth over time and could potentially lead to a fiscal crisis if borrowers lose faith in the country’s ability to repay.

Second, rapidly increasing debt constrains the government’s ability to effectively respond to emergencies, such as recessions, wars, or natural disasters.

Third, as government debt grows and interest rates rise, interest payments on federal debt will exponentially increase and will make up a growing portion of federal spending, crowding out priorities like defense, investment, and safety net programs. By 2026, CBO’s realistic scenario shows interest payments on the federal debt that exceed total defense spending. By 2028, those payments could reach nearly $1 trillion (more than 3 percent of U.S. GDP!). Americans receive no direct service or benefit for the tax dollars that go to servicing our debt, which will ultimately fall to the next generation.

Moving Forward

CBO leaves little doubt that the U.S. is on an unsustainable fiscal path, and further, that the recent unfunded tax cuts and spending increases have only made matters worse. What neither CBO nor anyone else can predict is exactly when the situation will turn from merely “unsustainable” to “economically dangerous,” with the potential for serious adverse consequences on economic growth and Americans’ day-to-day financial lives.

​Challenge

Republicans challenge the CBO projections.

So do I. The difference is Republican leadership thinks things will be better than CBO projections. I think they will be much worse.

History is on my side. Moreover, no one at the CBO has factored in an economic slowdown.

Finally, and as Lacy Hunt has noted, we have reached diminishing returns on how much GDP debt buys.

For discussion of diminishing returns, please please see The Name is Bond, Long Bond.

Mike "Mish" Shedlock

Comments (11)
No. 1-11
RonJ
RonJ

A parabolic rises at a faster and faster rate

Gasmire
Gasmire

The War on Debt is the only war our 'leaders' will avoid.

Sechel
Sechel

Very irresponsible tax cut done by Congress and signed into law by the President This was politics above national interest All of the valid criticisms of what we had before could have been addressed without destroying the deficit more.

1KoolKat
1KoolKat

This the same CBO that wrote in Oct 1981 -

Ambrose_Bierce
Ambrose_Bierce

It's all about servicing the debt, while most of it was issued at rock bottom yields it should be relatively easy to roll it over. The next decade will be all about bonds, and the Fed will shake money out of stocks to prepare the market for new issuance. While the last few decades have been about the private sector, the next few will be about bigger government as corporate margins will get squeezed. Can governments invest wisely? While pension funds have become so large, they might go into private equity, or running businesses. Since government is the employer of last resort, they can raise wages and taxes concurrently and control economic growth. A lot this we are learning from Chinas centrally planned economy, profits are a bad word, if they prove an obstacle to economic development. The question is how much economic development can the planet handle, and where do the consumers come from?.