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The CBO has issued its mid-year update to its Budget and Economic Outlook, which covers the years from 2016 through 2026. Here’s their summary of the main change in what they project for the next 10 years.
CBO’s estimate of the deficit for 2016 has increased since the agency issued its previous estimates in March, primarily because revenues are now expected to be lower than earlier anticipated. In contrast, the cumulative deficit through 2026 is smaller in CBO’s current baseline projections than the shortfall projected in March, chiefly because the agency now projects lower interest rates and thus lower outlays for interest payments on federal debt. Nevertheless, by 2026, the deficit is projected to be considerably larger relative to gross domestic product (GDP) than its average over the past 50 years.
That seems like something of a mixed bag, where the U.S. government’s budget deficit will be larger than projected in 2016 and 2017, but will be smaller than the CBO had previously projected in the following 8 years, but the reason for that change is the same: the U.S. economy is currently growing more slowly than they previously anticipated. In 2016, that slower economic growth means larger deficits, but in future years, that same slower growth translates into lower than previously expected interest rates, which means smaller payments on the U.S. national debt, which they believe will offset the reduction in the U.S. government’s tax revenues in those years.
Figure 1-1 of the CBO’s mid-year update shows what they now expect for the U.S. government’s annual budget deficit, which after 2018, is projected to steadily grow to levels that in the previous 50 years, were typically only seen during deep U.S. recessions.
Figure 1-2 in the report shows what the CBO now expects for the U.S. government’s current spending and revenue collection trends.
Under current law, the CBO projects that the U.S. government’s revenue will rise as a percentage share of GDP throughout the next 10 years. At the same time, the CBO projects that the U.S. government’s spending will rise even faster, which is why the government’s annual budget deficits are projected to steadily rise. Both trends are well above the government’s long-term historical averages, which means that the cause of the projected growing deficit problem isn’t that the government won’t be collecting enough taxes, but rather that it will be spending too much money.
Compared to 2015, the U.S. government’s budget deficit in 2016 will be 35% larger at $590 billion. And though future budget deficits through 2026 are now projected to rise more slowly than what was anticipated 6 months ago, the cumulative effect of those budget deficits will increase the public portion of the U.S. government’s total public debt outstanding from 77% of GDP to 86% of GDP.
Considering the bigger picture for the U.S. government’s fiscal outlook by including the intragovernmental portion of the national debt, the U.S. government’s total public debt outstanding of $19.4 trillion is about 106% of GDP. If the CBO’s 10 year projection holds, the total national debt of the U.S. government will rise to be around 125% of GDP by 2026.
The historic record for that figure was set in 1945, when the U.S. was fighting World War 2, which drove the national debt up to reach 119% of GDP. According to the CBO’s new projections, it looks like the U.S. government could beat that record sometime in 2022.