Debt Could Reach 125% of GDP With Irresponsible Actions

Interested in the federal budget? Not so much I’m guessing, but I think we all should be. Note especially the paragraph I highlighted. Congress does not act responsibly and certainly does not consider long-term consequences.

May 31, 2022

The Congressional Budget Office’s (CBO) new budget projections find that debt will reach a record 110 percent of Gross Domestic Product (GDP) ($40.2 trillion) by the end of Fiscal Year (FY) 2032, while the deficit will reach 6.1 percent of GDP ($2.3 trillion) and interest costs will total a record 3.3 percent of GDP ($1.2 trillion).

These current law projections may prove optimistic, however, since they assume policymakers will allow a number of temporary policies to expire, only grow discretionary spending with inflation, and won’t pass any new deficit-financed legislation. In this analysis, we outline two alternative scenarios that may prove more realistic. We find deficits in 2032 could total $2.8 to $3.1 trillion, while debt could reach 118 to 125 percent of GDP and interest payments could grow to as high as $1.3 trillion, which would be a record 3.6 percent of GDP.

CBO’s baseline budget projections reflect current law, meaning they, appropriately, do not include the effects of any future legislation or administrative actions, even for temporary policies that have been routinely extended. With so many temporary policies likely to be extended to at least some degree and several pieces of deficit-increasing legislation being actively considered, CBO’s current law projections almost certainly reflect an overly optimistic policy environment.

In particular, CBO’s current law baseline assumes the individual tax cuts in the Tax Cuts and Jobs Act (TCJA) expire at the end of calendar year 2025 and future discretionary spending grows with inflation, despite new national security challenges, immense pressure to boost both the defense- and non-defense sides of the budget, and no discretionary spending caps to constrain appropriations levels. Because of when the baseline was constructed, it also doesn’t incorporate several policies enacted just before its publication, including $41 billion of aid to Ukraine and several administrative changes related to student loans and health care spending. On the other hand, it extrapolates hundreds of billions of dollars of temporary funding in the bipartisan Infrastructure Investment and Jobs Act (IIJA) that lawmakers would have to, but don’t intend to, appropriate in future legislation.

If we instead assume that the TCJA tax cuts are extended permanently and discretionary spending grows with GDP along with the adjustments mentioned above, deficits through FY 2032 would be $3.1 trillion, and debt would reach a record 118 percent of GDP by 2032. 

On top of this, policymakers may undertake several other costly fiscal actions. For example, they may continue various “tax extenders” and “health extenders,” along with full expensing for equipment, a few trade promotion policies, and the soon-expiring expansion of Affordable Care Act subsidies. In addition, Congress is currently considering a bill to expand veterans’ compensation and health coverage for those with toxic exposure, a competition bill with funding for semiconductor production, and a bill providing additional funding for restaurants and other small businesses. They may also consider reinstating immediate R&E expensing instead of a five-year write-off period that started this year and provide further aid for Ukraine and COVID treatment and vaccine funding. At the same time, the Biden Administration may consider extending the student loan repayment pause and broadly canceling some amount of student debt. Finally, lawmakers are likely to continue the practice of using phony CHIMPs (changes in mandatory programs) to enable higher discretionary spending.

Though it is unclear exactly how much many of these provisions will cost, a reasonable set of assumptions suggests they could add an additional $2.4 trillion to budget deficits through FY 2032 for a total of $5.5 trillion of costs above current law. This would cause debt to reach a record 125 percent of GDP by 2032.

Source: Committee for a Responsible Federal Budget