Ten years ago, the U.S. federal debt exploded in the aftermath of the Great Recession. Major media outlets and policymakers were discussing the issue daily. A fiscal commission, a supercommittee, and automatic spending cuts came and went, all without meaningful progress on tackling the long-term fiscal challenge. But as the economy improved, annual deficits shrank, and attention turned to other pressing matters, and the problem was all but forgotten. In fact, rather than addressing the issue, tax and spending policy in the intervening years has only dug the hole deeper.
Fast forward to this week, when a new report from the Congressional Budget Office described a situation that has grown markedly worse. Federal debt held by the public is now at 81% of gross domestic product and is anticipated to nearly match the size of the U.S. economy (98% of GDP) by 2030, according to the baseline in the latest Budget and Economic Outlook. This level would be nearly unprecedented in American history.
CBO’s latest baseline debt forecast rose from its previous report primarily due to the budget deal enacted late last year, which permanently repealed a series of taxes introduced by the Affordable Care Act, including the “Cadillac tax” on expensive health insurance plans. The true fiscal picture is even worse than the baseline indicates, as CBO is required to assume a current-law scenario that is unlikely to occur. Most notably, the baseline includes the scheduled expiration of the 2017 Tax Cuts and Jobs Act’s individual income tax cuts in 2025. Using a more likely policy scenario that assumes revenue levels do not dramatically increase at that point, debt held by the public will grow to $33 trillion by 2030, equivalent to 102% of GDP.
Why will federal debt continue to rise? As Chart 2 illustrates, under current policy, the gap between annual spending and revenues is already large and expected to grow, ensuring that the federal government will have trillion-dollar deficits as far as the eye can see unless policymakers step up to the plate.
In fiscal year 2020, the federal government will spend a total of $4.6 trillion, or 21% of GDP, while collecting $3.6 trillion in revenue, or 16.4% of GDP, producing a deficit of roughly $1 trillion. By 2030, federal spending will grow to 23.4% of GDP and, assuming the 2017 tax bill’s individual income tax cuts are extended, revenues will only increase to 17.1% of GDP. As a result, the deficit will exceed $2 trillion, equaling 6.3% of GDP, in 2030.
The forecasted rise in federal spending stems from growth in major health care programs, Social Security, and interest payments on existing debt.
|Discretionary||Healthcare||Social Security||Net Interest||Other Mandatory|
Between 2020 and 2030, as baby boomers retire, spending on major health care programs, primarily Medicare and Medicaid, will rise from 5.4% to 7% of GDP and spending on Social Security will increase from 4.9% to 6% of GDP. Since passage of the ACA in 2010, Congress has shown little appetite for legislation that would significantly curtail health care cost growth, while polarized positions on Social Security have barely budged.
Additionally, interest payments will continue to grow, rising from 1.7% to 2.6% of GDP. By 2025, interest payments will surpass Medicaid and become the fourth largest spending item in the federal budget. It is noteworthy, however, that CBO revised downward the growth in interest payments because of lower projected interest rates over the coming decade.
Meanwhile, federal revenues have fallen to insufficient levels. Chart 4 demonstrates that over the next decade, revenues are projected to average only 16.9% of GDP if current policy remains in place. That is well below the average level of 19.4% of GDP during the budget surplus era of the late 1990s and early 2000s.
The decline in revenues since that time is tied to several tax cuts over the past two decades, the latest being the 2017 Tax Cuts and Jobs Act. Over the next decade, even surplus-era revenue levels of 19.4% of GDP would not be enough to prevent annual deficits from growing because of the considerable rise in mandatory spending on health care, Social Security, and interest payments.
The latest CBO projections should not surprise anyone. It is well documented that growth in mandatory spending and tax cuts have ballooned federal debt and placed the nation on an unsustainable fiscal trajectory. This reality is even more concerning given that the current economic expansion has lasted more than 10 years, meaning that now should be a time when deficits are shrinking.
Where are all the voices in the media, on Capitol Hill, and in the administration calling for fiscal responsibility? The front pages are focused elsewhere, and any discussion of budget policy now seems to consist of calls for “Medicare for All,” free college, guaranteed jobs, and more tax cuts as part of the 2020 presidential campaign. America needs to get serious about its fiscal challenges, and soon, or else a rude awakening will do that on our behalf.