At 78 percent of gross domestic product (GDP), federal debt held by the public is now at its highest level since shortly after World War II. If current laws generally remained unchanged, CBO projects, growing budget deficits would boost that debt sharply over the next 30 years; it would approach 100 percent of GDP by the end of the next decade and 152 percent by 2048. That amount would be the highest in the nation’s history by far. Moreover, if lawmakers changed current law to maintain certain policies now in place—preventing a significant increase in individual income taxes in 2026, for example—the result would be even larger increases in debt. The prospect of large and growing debt poses substantial risks for the nation and presents policymakers with significant challenges.
In this report, CBO presents its projections of federal spending, revenues, deficits, and debt for the next three decades and describes some possible consequences of those budgetary outcomes. This report’s projections are consistent with the 10-year baseline budget and economic projections that CBO published in the spring of 2018. They extend most of the concepts underlying those projections for an additional 20 years, and they reflect the macroeconomic effects of projected fiscal policy over that 30-year period. All together, they constitute the agency’s extended baseline projections.
CBO’s 10-year and extended baseline projections are not predictions of budgetary outcomes. Rather, they represent the agency’s best assessment of future spending, revenues, deficits, and debt under the assumption that current laws generally remain unchanged. They also give lawmakers a point of comparison from which to measure the effects of proposed legislation.
Why Are Projected Deficits Rising?
In CBO’s projections, the federal budget deficit, relative to the size of the economy, would grow substantially over the next several years, stabilize for a few years, and then grow again over the rest of the 30-year period. In total, deficits would rise from 3.9 percent of GDP in 2018 to 9.5 percent in 2048. (Adjusted to exclude the effects of timing shifts that occur because fiscal year 2018 began on a weekend, the budget deficit in 2018 would be higher, at 4.2 percent of GDP). Those large budget deficits would arise because spending would grow steadily under current law, and revenues would not keep pace with that spending growth.
In particular, over the next 30 years, spending as a share of GDP would increase for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt. In CBO’s projections, most of the spending growth for Social Security and Medicare results from the aging of the population: As members of the baby-boom generation (people born between 1946 and 1964) age and as life expectancy continues to rise, the percentage of the population age 65 or older will grow sharply, boosting the number of beneficiaries of those programs. Growth in spending on Medicare and the other major health care programs is also driven by rising health care costs per person. In addition, the federal government’s net interest costs are projected to climb sharply as a percentage of GDP as interest rates rise from their currently low levels and as debt accumulates.
That spending growth would be only partially offset by declining spending for other programs. Mandatory spending other than that for Social Security and the major health care programs—such as spending for federal employees’ pensions and for various income security programs—is projected to decrease as a percentage of GDP. Discretionary spending is projected to decline in most years over the next decade and then roughly stabilize as a percentage of GDP. (Mandatory spending is generally governed by provisions of permanent law, whereas discretionary spending is controlled by annual appropriation acts.)
Revenues, in contrast, would take a different path. They are projected to be roughly flat over the next few years relative to GDP, rise slowly, and then jump in 2026. Revenues would sharply increase that year because most of the provisions of Public Law 115-97 (originally called the Tax Cuts and Jobs Act and called the 2017 tax act in this report) that directly affect the individual income tax rate are set to expire at the end of calendar year 2025. (The 2017 tax act lowered individual income taxes beginning in 2018.) Thereafter, revenues would continue to rise relative to the size of the economy—although they would not keep pace with spending growth.
The projected growth in revenues beyond 2028 is largely attributable to increases in individual income tax receipts. Those receipts are projected to grow mainly because income would rise more quickly than the price index that is used to adjust tax brackets and other parameters of the tax system. As a result, more income would be pushed into higher tax brackets over time. (Because of provisions of the 2017 tax act, the effect of real bracket creep in this year’s projections is slightly greater than the effect that CBO projected in prior years.) Combined receipts from all other sources are projected to increase slightly as a percentage of GDP.
What Might Happen If Current Laws Remained Unchanged?
Large and growing federal debt over the coming decades would hurt the economy and constrain future budget policy. The amount of debt that is projected under the extended baseline would reduce national saving and income in the long term; increase the government’s interest costs, putting more pressure on the rest of the budget; limit lawmakers’ ability to respond to unforeseen events; and increase the likelihood of a fiscal crisis. (In that event, investors would become unwilling to finance the government’s borrowing unless they were compensated with very high interest rates.)
How Does CBO Make Its Long-Term Budget Projections?
CBO’s extended baseline, produced once a year, shows the budget’s long-term path under most of the same assumptions that the agency uses in constructing its 10-year baseline. Both baselines incorporate these assumptions: current laws will generally remain unchanged, mandatory programs will be extended after their authorizations lapse, and spending for Medicare and Social Security will continue as scheduled even if their trust funds are exhausted. CBO makes those assumptions to conform to statutory requirements.
Some projections, such as those for Social Security spending and collections of individual income taxes, incorporate detailed estimates of how people would be affected by particular elements of programs or by the tax code. Other projections reflect past trends and CBO’s assessments of how those trends would evolve if current laws generally remained unchanged.
CBO’s budget projections are built on its demographic and economic projections. CBO estimates that the population will grow more slowly than it has in the past and will be older, on average. CBO also anticipates that if current laws generally did not change, real GDP—that is, GDP with the effects of inflation removed—would increase by 1.9 percent per year, on average, over the next 30 years. That rate is nearly 1 percentage point lower than the annual average growth rate of real GDP over the past 50 years. That expectation of slower economic growth in the future is attributable to several factors—most notably, slower growth of the labor force. Projected growth in output is also held down by the effects of changes in fiscal policy under current law—above all, by the reduction in private investment that is projected to result from rising federal deficits.
How Uncertain Are Those Projections?
If current laws governing taxes and spending remained generally the same, debt would rise as a percentage of GDP over the next 30 years, according to CBO’s central estimate (the middle of the distribution of potential outcomes). That projection is very uncertain, however, so the agency examined in detail how debt would change if four key factors were higher or lower than their levels in the extended baseline. Those four factors are labor force participation, productivity in the economy, interest rates on federal debt, and health care costs per person. Other factors—such as an economic depression, a major war, or unexpected changes in rates of fertility, immigration, or mortality—also could affect the trajectory of debt. Taking into account a range of uncertainty around CBO’s central projections of those four key inputs, CBO concludes that despite the considerable uncertainty of long-term projections, debt as a percentage of GDP would probably be greater—in all likelihood, much greater—than it is today if current laws remained generally unchanged.
How Large Would Changes in Spending or Revenues Need to Be to Reach Certain Goals for Federal Debt?
CBO estimated the size of changes that would be needed to achieve a chosen goal for federal debt. For example, if lawmakers wanted to reduce the amount of debt in 2048 to 41 percent of GDP (its average over the past 50 years), they might cut noninterest spending, increase revenues, or take a combination of both approaches to make changes that equaled 3.0 percent of GDP each year starting in 2019. (In dollar terms, that amount would total about $630 billion in 2019.) If, instead, policymakers wanted debt in 2048 to equal its current share of GDP (78 percent), the necessary changes would be smaller (although still substantial), totaling 1.9 percent of GDP per year (or about $400 billion in 2019). The longer lawmakers waited to act, the larger the policy changes would need to be to reach any particular goal for federal debt.
How Have CBO’s Projections Changed Over the Past Year?
Compared with last year’s projections, CBO’s current projections of debt as a share of GDP are higher through 2041 and lower thereafter. CBO now projects that debt measured as a share of GDP would be 3 percentage points lower in 2047 than it projected last year. (The previous edition of this volume showed projections through 2047.) The increase in debt through 2041 stems primarily from tax and spending legislation enacted since then that boosted projected deficits through 2025—especially the 2017 tax act, the Bipartisan Budget Act of 2018 (P.L. 115-123), and the Consolidated Appropriations Act, 2018 (P.L. 115-141). In particular, the budgetary effects of the tax act are expected to peak during the middle of the next decade. In later years, the effects are expected to be modest, although their precise magnitudes are uncertain.
Deficits are smaller after 2025 than CBO projected last year because of lower projections as a share of GDP of noninterest spending and because of projections of revenues that are the same or higher than CBO estimated last year. The smaller deficits result in lower debt as a share of GDP after 2041 than CBO projected last year.
