Under Multiple Budget Scenarios, the Government's Numbers Still Don't Add Up

If you're a glutton for punishment, you might be a follower of the Congressional Budget Office's (CBO) depressing analyses of the federal government's fiscal prospects based on tax and spending trends. The term "unsustainable" features frequently, though "fiscal crisis" seems to have recently gained popularity. But circumstances and choices affect outcomes, so the CBO recently peered into its crystal ball based on scenarios that vary from official assumptions about economic conditions and policy choices. The results vary widely, but all examined paths lead to a future of growing debt and a hobbled economy.

For starters, it's worth knowing the CBO's formal projections, as published last month in the 2023 Long-Term Budget Outlook. Reason's Eric Boehm summarized the findings at the time: "The federal government is on pace to borrow $116 trillion over the next 30 years, and merely paying the interest costs on the accumulated national debt will require a staggering 35 percent of annual federal revenue by the end of that time frame." Federal debt will rise from 98 percent of GDP in 2023 to 181 percent in 2053 "and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices," according to the CBO report.

Frightening Forecast as Best-Case Scenario

But that forecast is based on unrealistically rosy assumptions. Things are likely to be worse.

"In CBO's extended baseline projections, discretionary spending is smaller and revenues are larger, on average, than they have been as a share of GDP over the past 30 years," the CBO notes in The Long-Term Budget Outlook Under Alternative Scenarios for the Economy and the Budget, published last week. "For this report, CBO analyzed a historical-rate scenario in which discretionary spending and revenues (measured as a percentage of GDP) are set for the entire projection period to the average values they had over the past 30 years."

So, if the federal government continues to spend the way it has for three decades, and to collect taxes the way it has for the same period of time, "debt held by the public would exceed 250 percent of GDP by the end of the projection period." What would be the consequences of such staggeringly high national debt on economic growth and American prosperity? The CBO leaves it to our imagination.

"Because of the significant uncertainty about the effects that such high levels of debt could have on the economy, CBO only reports specific economic or budgetary outcomes when debt is below that threshold. CBO does not interpret debt exceeding 250 percent of GDP as having reached a tipping point because the agency cannot predict with any confidence whether or when abrupt macroeconomic changes might occur in response to the amount and trajectory of federal debt."

Given that debt at 181 percent of GDP would "pose significant risks to the fiscal and economic outlook," a refusal to even speculate about the effects of debt 70 percentage points higher sounds…bad.

It's Not All So Gloomy. Sort Of.

Not all of the variations examined in the report are so grim. The report also considers scenarios under which labor and capital productivity grow at different rates than predicted. If it grows 0.5 percent faster than anticipated, debt would rise to 137 percent of GDP in 2053; if 0.5 percent slower, it would rise to 228 percent of GDP.

If private investment is crowded out by government borrowing by twice as much as forecast in the long-term outlook, federal debt would rise above 250 percent of GDP in 2053, but if there's no crowding out, it would rise to 145 percent of GDP.

The report also examines what happens if, as is currently predicted, the Social Security trust fund is exhausted in 2033. While the CBO is required to assume uninterrupted payments for its baseline budget projections, the alternative scenario looks at the result of payments reduced to the amount available from dedicated funding sources starting in 2034. "The required reduction would amount to 25 percent in 2034 and would rise gradually to 28 percent in 2053."

As you'd expect, reducing Social Security payments would lower federal debt—to 132 percent of GDP in 2053. It's also predicted to be economically disruptive, initially (but temporarily) shrinking the economy. Interestingly, the CBO predicts better outcomes over time than in its baseline outlook because reducing payments would promote savings and investment and keep people in the job market.

"In the long run, though, output would be higher than it is in the extended baseline, mainly as a result of three factors. First, the supply of labor would expand. Second, private investment would increase following a rise in private savings as some workers chose to save more while working to offset the effect of smaller benefits on their income and spending in retirement. Third, the amount of funds available for private investment would grow, owing to smaller budget deficits and an associated reduction in borrowing by the federal government, which would reduce interest rates and boost output."

Balanced Budgets Are Too Unlikely To Consider

Perhaps because CBO economists don't want to fritter their time away on pure fantasy, none of the scenarios contemplate balanced budgets, with the government spending no more than it collects. All the alternatives assume continuing deficits, with spending exceeding revenues and contributing to debt.

It's difficult to avoid the impression that the CBO is telling Congress and the White House that it doesn't think they're capable of acting responsibly. That's probably right. National debt is currently $32.59 trillion and rising. "The federal government has spent $1.39 trillion more than it has collected in fiscal year (FY) 2023," according to the Treasury Department. "Compared to the national deficit of $515 billion for the same period last year (Oct 2021—Jun 2022), our national deficit has increased by $878 billion." Borrowing for the first nine months of 2023 already exceeds that for the entire previous fiscal year.

"High debt levels slow income and wage growth, increase interest payments on the national debt, reduce the fiscal space available for the nation to respond to a recession or other emergency, place an undue burden on future generations, and increase the risk of a fiscal crisis," the Committee for a Responsible Federal Budget warned after the June release of the CBO's official long-term budget outlook. "Troubling as they are, CBO's projections may ultimately prove optimistic, as they assume policymakers will allow numerous policy expirations to take effect – including large parts of the Tax Cuts and Jobs Act of 2017 – and contain discretionary spending growth over the next decade."

Based on assumptions in line with past federal behavior, the group forecasts federal debt at 222 percent of GDP in 2053. That's well within the range contemplated by the CBO in its own alternative scenarios, and approaching the level beyond which government economists decline to contemplate consequences.

Maybe federal finances won't ultimately be quite so dire. But politicians seem determined to accumulate deficits and debt with unpleasant consequences for American prosperity.