The Congressional Budget Office said today that the end of pandemic-era spending, fast economic growth and higher tax revenues have caused the federal debt this year to be lower than forecast.
But the non-partisan office also includes a warning in its 30-year outlook about how debt will soon spiral upward to new highs that could ultimately imperil the U.S. economy. The estimates show the complex politics beneath government finances. Debt-related pressures have faded somewhat in the short-term for lawmakers, even as they continue to loom as a troubling risk for future congresses and presidents.
Accumulated debt held by the public will be equal to 98% of U.S. gross domestic product this year, four points lower than the 2021 forecast. But this would be a brief respite from rising levels of debt that would surpass the historical high in 2031 and climb by 2052 to 185% of GDP.
President Joe Biden has made reducing the annual budget deficit a priority, but that would likely require tax increases that Republican lawmakers and some Democrats oppose. GOP lawmakers have stressed the importance of containing federal debt, yet annual deficits worsened during the tenure of former President Donald Trump.
This year’s budget deficit is equal to 3.9% of GDP, but annual federal borrowing will average nearly twice that level — 7.3% — over the next 30 years.
The CBO views debt increases as a danger to the economy and action by lawmakers as needed to put the U.S. on a safer and financially sustainable path. They say the current path of federal debt could slow growth, increase interest payments to foreign nationals, heighten the odds of a fiscal crisis and make the economy more vulnerable to rising interest rates.
So, why is the debt rising over the next three decades?
The simple answer is that spending commitments are rising faster than tax revenues. This year, federal spending equals 23.5% of GDP. That figure will rise because of higher interest expenses and rising costs for major health care programs and Social Security. By 2052, the CBO said, federal spending will be 30.2% of GDP.
But taxes are not growing as a share of the total economy. They’re 19.6% of GDP this year and are estimated to be 19.1% of GDP in 2052.
Underlying all of this is changes in U.S. demographics. Americans are steadily aging with a rising number becoming 65 or older, but they’re also having fewer children and population growth will become more dependent on immigration from abroad, according to a separate report on demographics that the CBO released today.
Smaller population growth can hurt economic growth. That’s because economies expand by a combination of adding workers and improving the productivity of workers. By 2043, fertility rates will go low that immigration will account for all U.S. population growth, according to the CBO.