July
2, 2021 Gordon Gray
Executive Summary
·
According to new
projections from the Congressional Budget Office (CBO), the debt will eclipse
the highest levels in U.S. history by the end of fiscal year 2031.
·
Since CBO’s last
baseline update in February, Congress enacted the American Rescue Plan, a $1.8
trillion fiscal package, while rising vaccinations rates have allowed for
substantial reopening of the U.S. economy.
·
The CBO outlook reflect
both developments: the federal budget has worsened in nominal terms (inclusive
of 2021), but since the economy has improved to a greater degree relative to
CBO’s previous estimate, the fiscal outlook has slightly improved when measured
as a share of gross domestic product.
Introduction
The
Congressional Budget Office (CBO) released an update to its
periodic budget and economic outlook, which provides Congress with
10-year budget and economic projections. These updates reflect the budgetary
and economic effects of the American Rescue Plan (ARP), a $1.8 trillion policy
initiative, as well as the improved pace of economic activity following
increased uptake and proliferation of vaccines. The outlook reflects a clear
picture for both the U.S. fiscal and economic trajectory: While poised to see
an increasingly rapid economic recovery, the United States is grappling with
fiscal challenges that will see it become more indebted than ever before in its
history.
What’s Changed?
The
July 2021 CBO budget outlook is, in nominal terms, worse than CBO’s projections
released in February, primarily due to the ARP, which CBO estimated would add $1.8
trillion to baseline deficits. CBO has improved its economic
outlook, however. Stronger economic growth, all else equal, leads to higher tax
collections, and lower expenditures on many transfer programs. CBO has also
marked up its inflation projections, which is reflected in its estimates for interest
rates. Given the size of the U.S. debt, the federal budget is increasingly
exposed to interest rate risk, which is reflected in growing debt service
costs. While CBO typically decomposes economic, legislative, and technical
changes in its baseline updates, the agency will release those details in a
follow-on update later this month.
The Budget Outlook: By the Numbers
Taxes: By the end of the
10-year budget window, tax revenues will amount to 17.7 percent of gross
domestic product (GDP). Tax revenues will average 17.8 percent of GDP over the
next 10 years, well above the 17.3 percent historical average. CBO previously
estimated that tax revenues in 2021 would amount to 16 percent of GDP, but as
CBO notes, tax collections were significantly more robust.
Spending: CBO estimates that, by
the end of the budget window, overall spending will total 23.2 percent of GDP,
over 2.5 percentage points higher than the historical average of 20.6 percent.
Entitlement, or mandatory, spending will continue to remain roughly two-thirds
of federal outlays over the next decade. It comprised 70 percent of federal
outlays in 2021, up from 56 percent in 2011 and 35 percent in 1971.
Deficits: The federal budget
deficit is estimated to be $3 trillion in 2021, or 13.4 percent of GDP. Prior
to the $3.1 trillion deficit record in 2020, the highest nominal deficit ever
previously recorded was $1.4 trillion in 2009. As a share of GDP, the 2021
deficit of 13.4 percent of GDP would be the highest observed other than last
year and those of World War II. The deficit will average 4.1 percent of GDP
over the 2022-2031 period and will fall below $1 trillion in only one of those
years.
Interest Payments: Interest payments on the debt will reach $910 billion in 2031.
Interest payments are projected to more than double as a share of federal
outlays, rising from 5 percent of total federal spending in 2021 to over 11
percent of federal spending in 2031.
Debt Held by the Public: Borrowing from the public is projected to increase as a share of
the economy under current law, reaching 106.4 percent of GDP in
2031. The debt surpassed 100 percent of the economy in 2020, the first time
since 1946. By the end of the budget window, the debt is expected to reach the
highest level as a share of GDP in U.S. history – surpassing the 106.1 percent
record from 1946 following the end of World War II.
The Economic Outlook: By the Numbers
CBO
projects real GDP growth to average 2.0 percent over the budget window. It
forecasts that unemployment will return to pre-pandemic levels in 2022 decade,
although it estimates that unemployment will be slightly elevated by the end of
the decade compared with its prior forecast. CBO has significantly increased
its projections for interest rates compared to its prior forecast.
Under
CBO’s most recent projections, real GDP is projected to exceed pre-pandemic
levels in mid-2021 and to remain higher than that projected prior to the
pandemic and in CBO’s most recent prior outlook.
CBO also projects that real GDP is currently in
excess of potential GDP and will remain so until 2026. In CBO’s prior estimate,
CBO estimated that the economy would remain below potential until 2025 – at
which point it forecast that real GDP would exceed potential GDP until 2029
before declining.
The
most recent CBO forecast reflects an improved near-term outlook for
unemployment. According to CBO, unemployment will decline to levels forecast
prior to the pandemic by 2022 and, importantly, remain below its pre-pandemic
forecast until the end of the decade. By 2024, however, CBO estimates that
unemployment will exceed levels forecast in its most recent prior estimates.
Gordon Gray is the Director of Fiscal Policy at the American Action Forum.
https://www.americanactionforum.org/insight/highlights-of-cbos-update-to-the-budget-and-economic-outlook-for-2021-2031/#ixzz70ThxgvII
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