Deficit and Debt Projections

CBO Long-Term Budget Outlook March 30 2017:  

  • At 77 percent of gross domestic product (GDP), federal debt held by the public is now at its highest level since shortly after World War II.
  • If current laws generally remained unchanged, the Congressional Budget Office projects, growing budget deficits would boost that debt sharply over the next 30 years; it would reach 150 percent of GDP in 2047.
  • The prospect of such large and growing debt poses substantial risks for the nation and presents policymakers with significant challenges.
  • Why Are Projected Deficits Rising? In CBO’s projections, deficits rise over the next three decades—from 2.9 percent of GDP in 2017 to 9.8 percent in 2047—because spending growth is projected to outpace growth in revenues.  In particular, spending as a share of GDP increases for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt.
  • Much of the spending growth for Social Security and Medicare results from the aging of the population: As members of the baby-boom generation age and as life expectancy continues to increase, the percentage of the population age 65 or older will grow sharply, boosting the number of beneficiaries of those programs.
  • In addition, growth in spending on Medicare and the other major health care programs is driven by rising health care costs per person, which are projected to increase more quickly than GDP per capita (after the effects of aging and other demographic changes are removed). CBO projects that those health care costs will rise—although more slowly than they have in the past— in part because of the effects of new medical technologies and rising personal income.
  • The federal government’s net interest costs are projected to rise sharply as a percentage of GDP for two main reasons. The first and more important is that interest rates are expected to rise from their current low levels, making any given amount of debt more costly to finance. The second reason is the projected increase in deficits: The larger they are, the more the government will need to borrow.
  • Mandatory spending other than that for Social Security and the major health care programs—such as spending for federal employees’ pensions and for various income security programs—is projected to decline as a percentage of GDP, as is discretionary spending. (Mandatory spending is generally governed by provisions of permanent law, whereas discretionary spending is controlled by annual appropriation acts.)
  • The projected decline in discretionary spending stems largely from the caps on discretionary funding that are set in law for the next several years.
  • The modest projected growth in revenues relative to GDP over the next three decades is attributable to increases in individual income tax receipts. Those receipts are projected to grow mainly because CBO anticipates that income will rise more quickly than the price indexes that are used to adjust tax brackets. As a result, more income will be pushed into higher tax brackets over time. Combined receipts from all other sources are projected to decline as a percentage of GDP.
  • What Might the Consequences Be If Current Laws Remained Unchanged? Large and growing federal debt over the coming decades would hurt the economy and constrain future budget policy. The amount of debt that is projected under the extended baseline would reduce national saving and income in the long term; increase the government’s interest costs, putting more pressure on the rest of the budget; limit lawmakers’ ability to respond to unforeseen events; and increase the likelihood of a fiscal crisis, an occurrence in which investors become unwilling to finance a government’s borrowing unless they are compensated with very high interest rates.
  • 10-year projections follow the assumptions that current laws governing taxes and spending will generally remain unchanged but that some mandatory programs will be extended after their authorizations lapse and spending for Medicare and Social Security will continue as scheduled even if their trust funds are exhausted.
  • CBO’s budget projections are built on its economic projections, which incorporate the effects of the fiscal policy projected under current law. CBO anticipates that if current laws generally did not change, real GDP—that is, GDP with the effects of inflation excluded—would increase by 1.9 percent per year, on average, over the next 30 years. Over the past 50 years, the annual average growth rate of real GDP was roughly 1 percentage point higher. That slower economic growth in the future is attributable to several factors—notably, slower growth of the labor force, which is mainly a result of the aging of the population and the relative stability of women’s participation in the labor force after decades of increases. In addition, the productivity of labor is projected to grow more slowly than its historical average. Projected output growth also is held down by the effects of fiscal policy under current law—above all, by the reduction in private investment that is projected to result from rising federal debt.

Source: Congressional Budget Office, March 2017

The Long-Term Budget Outlook (as of July 2016)

Source: Congressional Budget Office, July 12, 2016

Current Debt Level:

Long-Term Outlook

Additional Resources on Deficits and Debt