Global Economy Briefs

Feb CBO Budget & Economic Projections are Troubling

February 15, 2023

The finances of the US government are materially worsening as is the economic outlook. According to the just-released Congressional Budget Office (CBO) Budget and Economic Outlook, the federal government’s debt burden (the debt owed to the public, expressed as a percentage of the nation’s gross domestic product, or GDP) will rise to its highest level in history within 10 years from its current outsized level of 98 percent to 118 percent, and then continue to rise to almost double the size of the economy by 2053. Perhaps most troubling is how the servicing of the debt will absorb a significant portion of the budget, crowding out the nation’s ability to fund its national priorities. Net outlays for interest nearly double over the period in CBO’s projections, rising from $739 billion in 2024 to $1.4 trillion in 2033. This burden has the potential to severely hinder future economic growth and business activity.

According to the CBO's new projections:

• In response to sharp increases in interest rates, the CBO expects economic growth to slow to just 0.3 percent year-over-year in 2023 (identical to The Conference Board’s forecast). Following that, CBO expects growth to rebound as inflation slowly abates. However, the CBO does not expect the Fed’s 2 percent inflation target to be achieved for several years. Compared to the CBO’s May 2022 projections, these forecasts are lower in the short-run but slightly higher in the medium-term.
   
• The CBO’s projections for debt as a percentage of GDP have worsened substantially. One reason is changes to the fiscal picture that were unanticipated or unmodeled in the prior forecast. Projections for the economy have become less optimistic, which boosts expected spending on mandatory programs; furthermore, high inflation and interest rates have driven a high Social Security cost of living adjustment and higher interest payments.  These adverse revisions to the near-term forecast also drive long-term projections. The 2022 forecast projected a debt to GDP ratio of 185% in 2052, and CBO now projects a debt to GDP ratio of 190% in that same year.
   
• Servicing the debt increases over the projection period, rising from 2.4 percent of GDP this year to 3.6 percent in 2033--in dollars terms rising from $739 billion in 2024 to $1.4 trillion in 2033. These net outlays are higher than they have been in any year since at least 1940.
   
• On the debt ceiling issue and the potential for sovereign default, the CBO estimates that the US may no longer be able service its debt sometime between July and September of this year. However, it noted that the extraordinary measures currently being used by the Treasury to service US debt could also run out before July if its tax and outlays projections are off.

Overall, these updated projections are more pessimistic than those published last summer and underscore the very dangerous and destabilizing path that US fiscal policy is on. The CBO expects the economy to continue wrestling with high interest rates and inflation for longer than previously anticipated, and for growth to falter in the short-term. On the budget outlook, the CBO’s projections for debt as a percentage of GDP have deteriorated. As noted above, the debt to GDP ratio is now projected to rise to 190% in 2052, as opposed to 185%, and further to 195% in 2053. In summary, the CBO’s already dour expectations about the future have become even worse.

As a new CED Solutions Brief clearly details, reining in the ballooning public debt and returning it to a responsible debt-to-GDP level of 70 percent must start now. Driving the urgency is two-fold: rising interest rates are already significantly increasing the cost of servicing the debt and crowding out important national budget priorities, and it will take substantial time to accomplish this task. The analysis by CED forecasts that it will take 20 to 30 years of a sustained effort to draw the debt-to-GDP ratio down from 95% to a responsible 70% with the least draconian fiscal hardship. This analysis is part of CED’s latest Solutions Brief, Debt Matters: A Road Map for Reducing the Outsized US Debt Burden to 70% of GDP. Read the report, which also includes a series of CED recommendations for returning to a path of fiscal health and stability, including a mix of spending cuts, tax reform, saving Social Security and Medicare, and returning to a responsible and enforceable budget process. 

Join us tomorrow, February 16^th @1:00PM ET for a CED Policy Watch Webcast with CBO Director Phill Swagel on Fiscal Health: Road Map For A Responsible Fiscal Budget During Economic Disruption. Register here.