The Congressional Budget Office (CBO) has updated its January “The Budget and Economic Outlook: 2019 to 2029,” and to what should be no great surprise, the U.S.’s projected fiscal condition is, well, not good. To anyone monitoring the CBO’s economic and budget updates, this is really not news. Nor is the insistence of some that the projected annual near trillion dollar on-budget deficits means it’s time to cut Democratic priorities. I suppose this sort of predictability among those who supported the “Tax Cuts and Jobs Act of 2017” (P.L. 115-97) is reassuring in a world where one struggles to find things on which to depend. So, cue up the calls among Republicans for fiscal responsibility that will become cacophonous should a Democrat retake the White House. Anyway on to specifics.
Here’s the CBO summary of the update:
- Deficits. In CBO’s projections, the federal budget deficit is $960 billion in 2019 and averages $1.2 trillion between 2020 and 2029. Over the coming decade, deficits (after adjustments to exclude the effects of shifts in the timing of certain payments) fluctuate between 4.4 percent and 4.8 percent of gross domestic product (GDP), well above the average over the past 50 years. Although both revenues and outlays grow faster than GDP over the next 10 years in CBO’s baseline projections, the gap between the two persists.
- Debt. As a result of those deficits, federal debt held by the public is projected to grow steadily, from 79 percent of GDP in 2019 to 95 percent in 2029—its highest level since just after World War II (see Chapter 1).
- The Economy. Real (inflation-adjusted) GDP is projected to grow by 2.3 percent in 2019, supporting strong labor market conditions that feature low unemployment and rising wages. This year, real output is projected to exceed CBO’s estimate of its potential (maximum sustainable) level. After 2019, consumer spending and purchases of goods and services by federal, state, and local governments are projected to grow at a slower pace, and annual output growth is projected to slow—averaging 1.8 percent over the 2020–2023 period—as real output returns to its historical relationship with potential output. From 2024 to 2029, both output and potential output are projected to grow at an average pace of 1.8 percent per year, which is less than the long-term historical average. at slowdown occurs primarily because the labor force is expected to grow more slowly than it has in the past (see Chapter 2).
- Changes in CBO’s Projections Since May 2019. CBO’s estimate of the deficit for 2019 is now $63 billion more—and its projection of the cumulative deficit over the 2020–2029 period, $809 billion more—than it was in May 2019. The agency’s baseline projections of primary deficits (that is, deficits excluding net outlays for interest) for that period increased by a total of $1.9 trillion. Recently enacted legislation accounts for most of that change. In particular, incorporating the higher discretionary funding limits for 2020 and 2021 that were established in the Bipartisan Budget Act of 2019 increased CBO’s projections of primary deficits for the 2020–2029 period by $1.5 trillion. (Those projections reflect the assumption—required by law—that future discretionary funding will grow at the rate of inflation after those limits expire.)
The CBO continues:
Partly offsetting the increase in projected primary deficits is a net reduction of $1.1 trillion in the agency’s projections of interest costs over that same period. The largest factor contributing to that change is that CBO revised its forecast of interest rates downward, which lowered its projections of net interest outlays by $1.4 trillion (including interest savings from the resulting reductions in deficits and debt). Taken together, other changes to the budget projections increased projected debt-service costs by nearly $0.3 trillion; $0.2 trillion of that amount is associated with the increase in projected spending stemming from the Bipartisan Budget Act.
To contextualize this update, that shows FY 2019 will see a $980 billion deficit, in June 2017, CBO estimated that 2017 deficit would be $693 billion, “$109 billion more than the $585 billion deficit posted in 2016.” So, the deficit has been going in the wrong direction from a nominal dollars point of view. At that time, CBO explained the bases for this projection:
The projected rise in deficits would be the result of rapid growth in spending for federal retirement and health care programs targeted to older people and to rising interest payments on the government’s debt, accompanied by only moderate growth in revenue collections.
The waive in retirements does appear to be happening and there will undoubtedly be a surge in spending on Medicare. However, the CBO has been consistently wrong on its projections of interest rates on federal debt. In January 2006, CBO claimed
Interest rates are expected to move upward during the next two years, as the economy grows and the Federal Reserve continues to move toward a more neutral monetary policy. CBO forecasts that the three-month Treasury bill rate will rise to about 2.8 percent in 2005 and 4 percent in 2006; thereafter, it will average 4.6 percent, which is relatively low by historical standards. In the forecast, the rise in the rate for the 10-year Treasury note is somewhat smaller; it averages 4.8 percent in 2005 and 5.4 percent in 2006, then inches up to average 5.5 percent from 2007 to 2015.
However, in 2013, in the middle of the band CBO said would see interest rates averaging 5.5%, CBO said
CBO’s baseline economic forecast anticipates that the interest rate on 3-month Treasury bills—which has hovered near zero for the past several years—will climb to 4 percent by the end of 2017; by that point, the rate on 10-year Treasury notes is also projected to rise from its current level of around 2 percent. (Emphasis added.)
Perhaps CBO’s crystal ball on projected interest rates on federal debt is a bit cloudy?
As for other drivers behind this explosion in deficits and ultimately debt, in April 2018, CBO explained
Projected deficits over the 2018–2027 period have increased markedly since June 2017, when CBO issued its previous projections. The increase stems primarily from tax and spending legislation enacted since then—especially Public Law 115- 97 (originally called the Tax Cuts and Jobs Act and called the 2017 tax act in this report), the Bipartisan Budget Act of 2018 (P.L. 115- 123), and the Consolidated Appropriations Act, 2018 (P.L. 115-141). The legislation has significantly reduced revenues and increased outlays anticipated under current law.
However, the Bipartisan Budget deal and FY 2018 Omnibus pale in comparison to the size of the impact of the tax cut bill on the federal balance sheet. In 2018, CBO explained the package “increases the total projected deficit over the 2018–2028 period by about $1.9 trillion,” but, to be fair, $600 billion of that is increased service on federal debt on account of increased interest rates. But, the CBO used modeling that sounds very much like “dynamic scoring,” which takes into effect economic changes downstream from the change in federal spending that may mitigate or worsen the federal outlook. In this case, CBO claims increased economic activity will reduce the size of the total bill from $1.8 trillion in primary deficit to $1.3 trillion.
Consequently, there will be many Republicans, including the White House, to call for cuts in virtually all non-defense spending save for Social Security and Medicare, which are sacrosanct so long as seniors vote. It will be interesting to see how Democrats respond. My guess is that candidates for the Democratic nomination for president will call for rolling back the 2017 tax bill and for raising rates even further on the wealthy and corporations to pay for new ambitious social programs like Medicare for America or Medicare for All.