CBO Releases New Long-term Budget Outlook

Federal Tax

This week, the Congressional Budget Office (CBO) released its extended baseline projections, an annual update of what federal deficits, debt, spending, and revenues would look like over the next 30 years if current laws remain unchanged. These latest projections take into account the effects of the coronavirus pandemic and resulting economic disruption on revenues and spending. The CBO projects that federal debt as a percentage of Gross Domestic Product (GDP) will be 45 percentage points higher in 2049 than what was projected last year, primarily due to the effects of and response to the pandemic.

The Effects of the Coronavirus

The coronavirus pandemic, resulting economic crisis, and federal relief efforts create many short-term challenges to the federal budget.

The pandemic precipitated the steepest decline in output and employment in recent history, which is leading to a drop in tax revenue. At the same time, the federal response to the crisis is producing a large increase in spending. This combination will cause the federal budget deficit to spike.

The CBO estimated that the federal deficit as a share of GDP will increase from 4.6 percent in 2019 to 16 percent in 2020 and 8.6 percent in 2021. Federal debt will reach a historically high 98 percent of GDP this year—a level that has only been exceeded twice in U.S. history, as a result of World War II—and will hit a record high of 107 percent of GDP in 2023.

For comparison, in last year’s update, the CBO projected that the 2020 deficit as a share of GDP would be 4 percent, while federal debt as a share of GDP would be 79.5 percent. The coronavirus pandemic, fallout, and response drives most of the difference between the 2019 and 2020 projections.

Comparing CBO’s 2019 Outlook to the 2020 Outlook
  2019 Outlook 2020 Outlook

2020 deficit as a percentage of GDP

4% 16%

2020 debt as a percentage of GDP

79.5% 98.2%

Source: Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” https://www.cbo.gov/publication/56516

It is important to note that the CBO estimates the increased federal spending in response to the crisis “will partially offset the deterioration in economic conditions brought about by the pandemic.”

Reviewing the Long-term Outlook

Over the long term, the new projections paint a rather dismal outlook. Even after the short-term effects of the coronavirus pandemic fade, spending growth is set to outpace revenue growth due to rising interest costs and the costs associated with an aging population and excess health-care cost growth. This will push deficits higher each year and contribute to historic levels of federal debt if current laws remain unchanged.

Table 2 summarizes deficits, debt, spending, and revenue as a share of GDP over the next 30 years. While revenues are projected to increase slightly, primarily due to real bracket creep, spending is forecast to increase at a quicker pace, primarily due to the increasing interest costs and entitlement spending mentioned above. Annual deficits are projected to grow from 5 percent of GDP in 2030 to nearly 13 percent of GDP in 2050, when federal debt is also projected to reach 195 percent.

Summarizing the CBO Long-term Budget Outlook
  2030 2040 2050

Deficit as a percentage of GDP

5.3% 9.0% 12.6%

Debt as a percentage of GDP

108.9% 142.2% 195.2%

Spending as a percentage of GDP

23.1% 27.1% 31.2%

Revenue as a percentage of GDP

17.8% 18.1% 18.6%

Source: Congressional Budget Office, “The 2020 Long-Term Budget Outlook,” https://www.cbo.gov/publication/56516

Contextualizing the Deficit

According to CBO projections, because of the effects of the coronavirus pandemic and the much-needed federal response, the annual budget deficit will increase dramatically this year and next, reaching 16 percent and 8.6 percent of GDP, respectively. In dollar terms, the deficit will rise from its 2019 level of $984 billion to $3.3 trillion in 2020.

Below are a few tax changes that illustrate just how large a $3.3 trillion deficit is, using the Tax Foundation General Equilibrium Model:

  • It would take all the revenue that Democratic presidential nominee Joe Biden’s tax plan would raise on a dynamic basis over 10 years ($3.2 trillion) to nearly cover the 2020 deficit alone.
  • Raising each individual income tax rate bracket by 10 percentage points would increase revenue by $947 billion conventionally in 2021 ($690 billion dynamically when factoring in reduced economic output).
  • Raising each individual income tax rate bracket by 35 percentage points would increase revenue by $3.35 trillion conventionally in 2021 ($1.84 trillion dynamically when factoring in reduced economic output).
  • Raising the corporate income tax rate to 70 percent would increase revenue by nearly $600 billion conventionally in 2021 ($144 billion dynamically when factoring in reduced economic output).

As indicated by the lower dynamic scores in the above exercise, tax increases come with trade-offs in terms of reduced economic output and revenue-raising potential. As pressure mounts for lawmakers to address deficits after the health crisis is addressed and the economy is recovering, these trade-offs ought to be kept front of mind.

While this year’s and next year’s deficits are abnormally large due to the health crisis and recession, deficits and debt are projected to keep growing even when the effects of the pandemic fade due to structural deficits driven by demography and entitlement spending as well as interest costs.

The longer lawmakers wait to address growing deficits, the more drastic changes will be required to manage the level of debt. For example, to keep the federal debt at its 2019 level of 79 percent of GDP, the CBO projects that lawmakers would have to reduce the deficit by 3.6 percent annually beginning in 2025, 4.4 percent annually if they waited until 2030, and 5.9 percent annually if they waited until 2035.

The coronavirus pandemic and economic disruption has created a short-term budget challenge, but even when those effects fade, the new CBO extended baseline projections show a continuing trend of spending growth that outpaces revenue growth, leading to historic levels of long-run federal debt.

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