Four Point One Trillion

 Many posts have discussed federal deficits and the federal debt.

CBO:

CBO responds to a request from Senator Merkley for information about how federal deficits and debt held by the public would be affected by Public Law 119-21, an act to provide for reconciliation pursuant to title II of H. Con. Res. 14, and then additionally by making permanent 10 tax provisions that are temporary in that law.

CBO and the staff of the Joint Committee on Taxation (JCT) estimate that over the 2025–2034 period deficits will increase by $3.4 trillion for the legislation as enacted, excluding any macroeconomic or debt‑service effects.

CBO estimates that the additional debt-service costs under the legislation as enacted will total $718 billion over the 10-year period. That change will increase the cumulative effect on the deficit to $4.1 trillion. As a result, and net of any changes in borrowing for federal credit programs, the agency estimates that the legislation will increase debt held by the public at the end of 2034 by 9.5 percentage points relative to CBO's January 2025 baseline budgetary projections of gross domestic product (GDP). Other factors, such as administrative actions affecting tariffs and immigration, also have affected deficits and debt since January 2025 and will be reflected in CBO's next baseline.

Desmond Lachman at The National Interest:

A fundamental weakness of the US economy is that it relies on the kindness of strangers to finance its twin budget and trade deficits. Indeed, of the $29 trillion in outstanding U.S. Treasury bonds, foreigners own over $8 trillion. This makes it of paramount importance that the United States maintains investor confidence that it will not try to inflate or tax its way out from under its debt mountain. If it fails to maintain that confidence, the country could face a crisis in the bond or dollar markets

 

Blowing Up the Federal Debt

 Many posts have discussed federal deficits and the federal debt.

Sahil Kapur at NBC:

President Donald Trump’s “big, beautiful bill,” which he signed into law this month, will add $3.4 trillion to the U.S. national debt over the next decade, according to a report the nonpartisan Congressional Budget Office published Monday.

The report found that the law, which Republicans passed along party lines, will also “increase by 10 million the number of people without health insurance” by 2034.

The budget office scrutinized the final version of the bill after Republicans made a series of last-minute changes to cobble together the votes needed in the Senate; it passed 51-50. That revised version subsequently passed the House on a vote of 218-214. Trump enacted it on July 4.

The package extends Trump’s 2017 tax cuts while providing tax deductions for tips and overtime pay for the next four years. It includes hundreds of billions of dollars in new spending for the military and to carry out Trump’s mass deportation agenda. And it pays for some of that with cuts to Medicaid, SNAP benefits (which help low-income families purchase groceries) and clean energy funding.

The analysis found that the law’s net spending cuts of $1.1 trillion are outstripped by the $4.5 trillion in decreased revenue, compared with if the measure had not passed.

Deficit 2025

 Many posts have discussed federal deficits and the federal debt.

Fatima Hussein at AP:

The U.S. budget deficit has grown to more than $1.3 trillion in the first half of the 2025 fiscal year — the second highest six-month deficit on record, according to Treasury Department data released Thursday.

The deficit for October through March spans the administrations of President Joe Biden and President Donald Trump. The previous high in the four decades of recordkeeping was $1.7 trillion in the first half of fiscal year 2021, when the government was tackling the COVID-19 pandemic.

A Treasury official who spoke on the condition of anonymity to preview the data said the increased spending was in part due to a mix of expenditures, including cost of living increases to Social Security payouts, higher Medicare and Medicaid costs, increased disaster assistance to the Federal Emergency Management Agency and Defense Department spending.

Jacob Bogage at WP:

Senior tax officials are bracing for a sharp drop in revenue collected this spring, as an increasing number of individuals and businesses spurn filing their taxes or attempt to skip paying balances owed to the Internal Revenue Service, according to three people with knowledge of tax projections.

Treasury Department and IRS officials are predicting a decrease of more than 10 percent in tax receipts by the April 15 deadline compared with 2024, said the people, who spoke on the condition of anonymity to share nonpublic data. That would amount to more than $500 billion in lost federal revenue; the IRS collected $5.1 trillion last year. For context, the U.S. government spent $825 billion on the Defense Department in fiscal 2024.

“The idea of doing that in one year, it’s hard to grapple with how meaningful of a shift that represents,” said Natasha Sarin, president of the Yale Budget Lab and a senior Biden administration tax official.

Long Term Deficit and Debt

 Many posts have discussed federal deficits and the federal debt.

CBO, The Long-Term Budget Outlook: 2025 to 2055.

Debt

In CBO’s projections, federal debt held by the public, measured as a percentage of gross domestic product (GDP), increases in every year of the 2025–2055 period. By 2029, that debt climbs to 107 percent of GDP, exceeding the historical peak it reached immediately after World War II. In 2055, it reaches 156 percent of GDP and remains on track to increase thereafter. Such large and growing debt would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel constrained in their policy choices.

Deficits

The total federal budget deficit remains large by historical standards over the next 30 years, averaging 6.3 percent of GDP—more than one and a half times its average over the past 50 years—and reaching 7.3 percent of GDP in 2055. Those amounts are the result of rising interest costs and sustained primary deficits, which exclude net outlays for interest. Primary deficits average 2.0 percent of GDP over the 30-year period; over the past 50 years, they averaged 1.7 percent of GDP.

Outlays and Revenues

Federal outlays rise over the next 30 years, reaching 26.6 percent of GDP in 2055. They have exceeded that level only twice: during World War II and during the coronavirus pandemic. Growth in net interest costs; spending for federal health care programs, particularly Medicare; and spending for Social Security, especially over the next decade, drive that increase. Measured as a percentage of GDP, revenues increase over the next few years, largely because of the scheduled expiration of certain provisions of the 2017 tax act. Revenues generally continue to rise thereafter, reaching 19.3 percent of GDP in 2055, mainly because growth in real income (that is, income adjusted to remove the effects of changes in prices) boosts receipts from individual income taxes.

 

The DOGE Dodge

Americans vastly overestimate the amount of waste in the budget

Brian Riedl:

“Why aren’t you cheering Trump & DOGE? I thought you wanted spending and deficit cuts!" Because I’ve been doing this for 25 years and can’t be tricked by gimmicky nonsense. Trump’s first term added $8 trillion in enacted spending hikes and tax cuts to the deficit - half of which was unrelated to the pandemic. This time around, Trump has proposed roughly $8 trillion more in tax cuts and spending hikes over the decade. And right now, a GOP Congress is preparing to abandon most reconciliation cuts and instead add $325 billion this year in new spending. We’re headed towards $4 trillion deficits within a decade. So, no, I don’t get excited when DOGE cancels $1 billion in govt contracts. Or saves $3 billion in federal workforce reductions out of a $7,000 billion budget. Not when Trump and Congress are also preparing to add $800 billion more annually in proposed new tax cuts and spending. And no, the huge savings are not coming. Even (unrealistically) eliminating 20% of the federal workforce would save $60 billion, and overhauling federal systems to sharply reduce payment errors may save perhaps $80 billion (and is probably unlikely too). For all of DOGE’s bluster, administrative and executive reforms would at best save 1-2% of federal spending and offset only a small fraction of Trump’s red ink agenda. That leaves trying to unilaterally impound spending such as USAID—which is wildly illegal—or actually going to Congress to pare back spending the constitutional way. But Trump has already taken Social Security, Medicare, defense, veterans, border (and interest) off the table, which is 2/3 of all spending and is driving deficits. And the GOP Congress seems ready to give up on cutting the remaining one-third of spending. Want to cut spending and the deficit? How about they stop passing budget-busting bills. Don’t brag about your coupon-clipping frugality at the same time you are buying a $250,000 Ferrari. I’m not going to cheer Trump and DOGE for adding “only” $750 billion to deficits instead of $800 billion. We’re still going backwards. I’ve spent decades studying the federal budget. I know that $7 trillion(!) behemoth inside and out – where the money really goes, and where the savings opportunities lie. So I can also detect bullshitters who talk tough about trillion-dollar spending cuts without doing their homework. It’s the ones who claim most spending goes to undefined “waste,” federal salaries, immigrants, foreigners, Ukraine, or non-working welfare recipients. It’s the ones who claim we can easily balance the budget or cut $1 trillion without specifying exactly what line-items to cut. Or that we can return to 2019 spending levels for each program, which means a 20% inflationary cut, defaulting on the federal debt, and kicking off every senior who has since retired into Social Security and Medicare. It’s all hot air and empty bluster. Tough talk without following through on anything substantive. Just wait until you see the final deficit numbers in October. And this is why GOP movements to cut spending always fail. They make absurdly ambitious promises without doing their homework, understanding where the money goes, and specifying real plans to fix it. You can’t significantly cut the deficit just by cutting waste, firing bureaucrats, and defunding immigrants and foreigners. There are no easy short cuts. You have to stop cutting taxes and then address Social Security, Medicare, defense, and a lot of other popular programs. Wake me when the GOP goes there. So, no, I will not get excited about a couple billion in DOGE savings on one hand while Trump pushes Congress to add $8 trillion over the decade in tax cuts and spending with the other hand. I’m not that gullible.

Spending Is Easier Than Cutting

Americans vastly overestimate the amount of waste in the budget, and underestimate the difficulty of spending cuts.

 Bruce Mehlman:

Growing Government is Easy, Shrinking It is Hard. DOGE faces formidable political, procedural & even Constitutional hurdles. Congress has exclusive power to tax & spend. The Impoundment Act forbids Presidents from refusing to spend appropriated funds. The Administrative Procedures Act lays out mandatory, time-consuming steps to regulate or deregulate. The Federal Advisory Commission Act limits outside advisory entities, requiring open meetings, formal chartering, balanced membership, public involvement, and reporting. And Congress usually opposes slimming the government workforce since it impacts so many districts — “only 15% of the 2.19 million civilian full-time federal employees in the United States work in the Washington metro area.”

Thirty-Five Trillion in Debt

Many posts have discussed federal deficits and the federal debt.

Alan Rappeport at NYT:

America’s gross national debt topped $35 trillion for the first time on Monday, a reminder of the nation’s grim fiscal predicament as legislative fights over taxes and spending initiatives loom in Washington.

The Treasury Department noted the milestone in its daily report detailing the nation’s balance sheet. The red ink is mounting in the United States more quickly than many economists had predicted as the costs of federal programs enacted in recent years have exceeded initial projections.

The leading presidential candidates, Vice President Kamala Harris and former President Donald J. Trump, have said little about the nation’s deficits on the campaign trail, suggesting that the economic problem will only worsen in the coming years. Deep differences between Republicans and Democrats on policy priorities and resistance within both parties to enacting cuts to the biggest drivers of the national debt — Social Security and Medicare — have made it difficult to reduce America’s borrowing.

The Politics of the Federal Debt

Many posts have discussed federal deficits and the federal debt.

Brian Riedl nails it at Reason:

Paradoxically, the faster government debt escalates toward an inevitable debt crisis, the less politicians and voters seem to care. In the 1980s and 1990s, more modest deficits dominated economic policy debates and prompted six major deficit reduction deals that balanced the budget from 1998 through 2001. That era is long gone. In the past eight years, President Donald Trump and then Biden enacted $12 trillion in deficit-expanding legislation even as Social Security and Medicare shortfalls drove baseline deficits higher. When even liberal economists warned politicians that the post-pandemic economy faced a modest degree of rising inflation and interest rates—and that a federal spending spree would pour gasoline on that fire—lawmakers responded by enacting the $2 trillion American Rescue Plan. When inflation and mortgage rates resultantly surged to 9.1 percent and 7.8 percent, respectively, lawmakers brazenly continued the inflationary spending spree.

Why are we no longer responding to soaring debt and its economic consequences? While there are many factors, the three most important are these: 1) We've convinced ourselves that deficits do not matter; 2) partisan politics and the collapse of lawmaking have turned deficits into a weapon to be politicized rather than a problem to be solved; and 3) few of us are willing to face the unpopular reality that this issue cannot be resolved without fundamentally reforming Social Security, Medicare, and middle-class taxes.

Interest on the Debt

Many posts have discussed federal deficits and the federal debt.

From the Committee for a Responsible Federal Budget:

In the first seven months of Fiscal Year (FY) 2024, spending on net interest has reached $514 billion, surpassing spending on both national defense ($498 billion) and Medicare ($465 billion). Overall spending has totaled $3.9 trillion thus far. Spending on interest is also more than all the money spent this year on veterans, education, and transportation combined.

Interest on the debt is currently the fastest growing part of the budget, nearly doubling from $345 billion (1.6 percent of GDP) in FY 2020 to $659 billion (2.4 percent of GDP) in 2023, and net interest is on track to reach $870 billion (3.1 percent of GDP) by the end of FY 2024. Spending on interest is now the second largest line item in the budget and is expected to remain so for the rest of the fiscal year. By 2051, interest will be the largest line item in the budget.

Rising debt will continue to put upward pressure on interest rates. Without reforms to reduce the debt and interest, interest costs will keep rising, crowd out spending on other priorities, and burden future generations.

Budget Infographic, Fiscal 2023

 Many posts have discussed federal deficits and the federal debt.

From CBO:

The Fiscal Future Is Not Bright

Many posts have discussed federal deficits and the federal debt.

Mark J. Warshawsky at AEI:

Last week, the Treasury Department released, with no fanfare, the massive Financial Report (FR) of the US Government. Using an accrual accounting basis, rather than a cash basis, the FR shows a much poorer picture of the current finances of the federal government than the conventional budget. Even its uniformly optimistic assumptions project a clearly unsustainable future for the federal government’s budget under current policy.

The budget deficit under the conventional cash-basis terms increased from $1.4 trillion in 2022 to $1.7 trillion in 2023, or about 6.2 percent of GDP, mainly because of some weakness in tax revenues owing to a lower stock market in the prior year and the drying up of transfers from the Federal Reserve owing to higher interest rates. The alternative measure presented in the FR of the net call added this year by the federal government on the future resources of its citizens is the net operating cost, which includes accruals of retirement, disability, and health benefits to federal employees and veterans. At $3.4 trillion in 2023, or an eighth of GDP, it was double the cash basis deficit. In 2019, the net operating cost of the federal government was “only” $1.4 trillion.

Another way the FR presents the current financial status of the federal government is the net position— assets minus liabilities. In 2023, assets of $5.4 trillion include cash, inventory, loans receivable, as well as buildings, equipment, and general-purpose land. Liabilities of $42.9 trillion include federal debt held by the public of $26.3 trillion, or about 97 percent of GDP, and $14.3 trillion owed as an obligation for federal employee and veterans’ benefits payable. The net position of the federal government was thus negative $37.5 trillion in 2023, compared to $34.1 trillion in 2022. The worsening occurred mainly because debt outstanding increased by $2 trillion during the year.

The FR also does projections over the next 75 years of the conventional federal government budget measures of cash deficits and debt outstanding. It characterizes the situation as “unsustainable.” More specifically, it projects that the deficit will increase to 5.9 percent of GDP in 2028, 14.1 percent in 2047, 21.1 percent in 2070, and 29.1 percent by 2097. The causes are a growing primary deficit due to increased spending for Social Security and Medicare on the retiring baby boom generation, peaking at 4.4 percent of GDP in 2043, but mainly from the rapidly and continually growing torrent of interest spending as debt outstanding growing faster than the economy must be serviced. Indeed, debt as a share of GDP is projected to rise to 200 percent by 2047 and reach 531 percent by 2098.

Debt 2023: $33T

Alan Rappeport at NYT:

America’s gross national debt exceeded $33 trillion for the first time on Monday, providing a stark reminder of the country’s shaky fiscal trajectory at a moment when Washington faces the prospect of a government shutdown this month amid another fight over federal spending.

The Treasury Department noted the milestone in its daily report detailing the nation’s balance sheet. It came as Congress appeared to be faltering in its efforts to fund the government ahead of a Sept. 30 deadline. Unless Congress can pass a dozen appropriations bills or agree to a short-term extension of federal funding at existing levels, the United States will face its first government shutdown since 2019.

Over the weekend, House Republicans considered a short-term proposal that would slash spending for most federal agencies and resurrect tough Trump-era border initiatives to extend funding through the end of October. But the plan had little hope of breaking the impasse on Capitol Hill, with Republicans still divided on their demands and Democrats unlikely to support whatever compromise they reach among themselves.

The debate over the debt has grown louder this year, punctuated by an extended standoff over raising the nation’s borrowing cap.

That fight ended with a bipartisan agreement to suspend the debt limit for two years and cut federal spending by $1.5 trillion over a decade by essentially freezing some funding that had been projected to increase next year and then limiting spending to 1 percent growth in 2025. But the debt is on track to top $50 trillion by the end of the decade, even after newly passed spending cuts are taken into account, as interest on the debt mounts and the cost of the nation’s social safety net programs keeps growing.

Deficit and Debt 2023

Many posts have discussed federal deficits and the federal debt.

 From CBO:

Each year, the Congressional Budget Office publishes a report presenting its projections of what the federal budget and the economy would look like over the next 30 years if current laws generally remained unchanged. The long-term budget projections typically follow CBO’s 10-year baseline budget projections and then extend most of the concepts underlying them for an additional 20 years. This year, the long-term projections are based on CBO’s May 2023 baseline projections but also reflect the estimated budgetary effects of the Fiscal Responsibility Act of 2023 (Public Law 118-5), which was enacted on June 3, 2023.


In CBO’s projections, the deficit equals 5.8 percent of gross domestic product (GDP) in 2023, declines to 5.0 percent by 2027, and then grows in every year, reaching 10.0 percent of GDP in 2053. Over the past century, that level has been exceeded only during World War II and the coronavirus pandemic. The increase in the total deficit results from faster growth in spending than in revenues. The primary deficit, which excludes interest costs, equals 3.3 percent of GDP in both 2023 and 2053, but the total deficit is boosted by rising interest costs.


By the end of 2023, federal debt held by the public equals 98 percent of GDP. Debt then rises in relation to GDP: It surpasses its historical high in 2029, when it reaches 107 percent of GDP, and climbs to 181 percent of GDP by 2053. Such high and rising debt would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices. 

Federal debt as percentage of GDP 

Debt Limit Warning

 From CBO:

The debt limit—commonly called the debt ceiling—is the maximum amount of debt that the Department of the Treasury can issue to the public or to other federal agencies. The amount is set by law and has been increased or suspended over the years to allow for the additional borrowing needed to finance the government’s operations. On December 16, 2021, lawmakers raised the debt limit by $2.5 trillion to a total of $31.4 trillion.1 On January 19, 2023, that limit was reached, and the Treasury announced a “debt issuance suspension period” and began using well-established “extraordinary measures” to borrow additional funds without breaching the debt ceiling.

The Congressional Budget Office projects that if the debt limit remains unchanged, there is a significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all of its obligations. The extent to which the Treasury will be able to fund the government’s ongoing operations will remain uncertain throughout May, even if the Treasury ultimately runs out of funds in early June. That uncertainty exists because the timing and amount of revenue collections and outlays over the intervening weeks could differ from CBO’s projections.

If the debt limit is not raised or suspended before the Treasury’s cash and extraordinary measures are exhausted, the government will have to delay making payments for some activities, default on its debt obligations, or both.2 If the Treasury’s cash and extraordinary measures are sufficient to finance the government until June 15, expected quarterly tax receipts and additional extraordinary measures will probably allow the government to continue financing operations through at least the end of July.

Consquences of Default

Written Testimony of Mark Zandi Chief Economist of Moody’s Analytics, U.S. Senate Committee on Banking, Housing, and Urban Affairs’ Subcommittee on Economic Policy ““The Federal Debt Limit and its Economic and Financial Consequences” March 7, 2023

If lawmakers are unable to resolve the debt limit in time and the Treasury begins paying its bills late and defaults, financial markets would be roiled. A TARP moment seems likely, hearkening back to that dark day in autumn 2008 when Congress initially failed to pass the Troubled Asset Relief Program bailout of the banking system, and the stock market and other financial markets cratered. A similar crisis, characterized by spiking interest rates and plunging equity prices, would be ignited. Short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well.

It is unimaginable that lawmakers would allow things to get to this point, but as the TARP experience highlights, they have done the unimaginable before. Yet, if that experience is a guide, lawmakers would reverse course within a few days and resolve the debt limit impasse to allow the Treasury to resume issuing debt again and pay its bills. Much damage will have already been done, and although markets would right themselves, it would be too late for the already fragile economy, and a recession would ensue.

However, if lawmakers do not reverse course quickly and the impasse drags on for even a few weeks the hit to the economy would be cataclysmic. Most immediately, the federal government would have to slash its spending. Say if the debt limit was breached on October 1 and dragged on all month, the Treasury would have no choice but to cut government spending by an estimated $125 billion. And if there is no agreement in November, another close to $200 billion in spending would need to be cut. The hit to the economy as these government spending cuts cascade through the economy would be overwhelming.

Adding to the economic turmoil would be the loss of consumer, business, and investor confidence. Political brinkmanship over the operations of the federal government has been frightening for Americans to watch. In both the 2011 and 2013 debt limit episodes, households were closely attuned to the political hardball being played in Washington and consumer sentiment slumped. The brinkmanship is also unnerving for businesses, who will pullback on investment and hiring, and financial institutions, who will quickly turn more circumspect about extending credit to households and businesses.

The timing couldn’t be worse for the economy as even before the specter of a debt limit breach many CEOs and economists believe a recession is likely this year. With the Federal Reserve ramping up interest rates in an effort to quell wage and price pressures, avoiding a recession would be difficult even if nothing else went wrong. Most leading indicators of recession, including the prescient policy yield curve – the difference between 10-year Treasury yields and the federal fund rate – point to recession beginning later this year at about the time lawmakers will be doing battle over the limit.

Based on simulations of the Moody’s Analytics model of the U.S. and global economies, the economic downturn that would ensue would be comparable to that suffered during the global financial crisis. That means real GDP would decline beginning late this year and through much of 2024, falling over 4% peak to trough, costing the economy more than 7 million jobs, and pushing the unemployment rate to over 8%. Stock prices would fall by almost a fifth at the worst of the selloff, wiping out $10 trillion 4 in household wealth. Treasury yields, mortgage rates, and other consumer and corporate borrowing rates would spike, at least until the debt limit is resolved and Treasury payments resume. Even then, rates would not fall back to where they were previously. And the economy’s long-term growth prospects will be materially diminished. A decade from now, real GDP is almost one percentage point lower than if there had been a clean debt limit increase, there are 900,000 fewer jobs, and the full-employment unemployment rate is 0.1% percentage points higher.

Debt: Pay Now or Pay More Later

CBO analyzes the effects of waiting to stabilize the federal debt.

• Regardless of when the process was begun, stabilizing federal debt as a percentage of GDP would require that income tax receipts or benefit payments change substantially from their currently projected path.
• The longer policymakers waited to implement a policy change, the more debt would grow in relation to GDP, and the greater the policy changes needed to stabilize it would be.
• If the option of increasing income tax rates was chosen, the effects of delaying implementation would be greater than they would be under the option of cutting benefits: Increases in interest costs would be larger, GDP and household consumption would be lower, and debt as a percentage of GDP would be higher in the long run.
• Under either option, the negative effects of delaying the implementation of policy changes on people’s consumption and labor supply would be disproportionately borne by younger people and lower-income people.

 

Why Debt Matters

 Desmond Lachman at Inside Sources:

The major problem with a high public debt level is that it saddles the government with large future interest payment obligations. That leaves little room for other public expenditures and makes it difficult for the government to bring the budget deficit under control. Failing to rein in the deficit, in turn, risks keeping the public debt on an ever-increasing path. In that context, it has to be of deep concern that the non-partisan Congressional Budget Office is forecasting that on present trends the country’s public debt to GDP ratio will approximately double from around 100 percent at present to 200 percent by 2050.

A high public debt level highly compromises the Federal Reserve’s ability to keep inflation under control. In particular, it makes it difficult for the Fed to raise interest rates for fear of adding to the government’s interest payment burden. Such a consideration would seem to have particular pertinence today with inflation running at its fastest pace in the past forty years and with the Fed needing to raise interest rates substantially from its present zero bound if it hopes to get the inflation genie back into the bottle.

Especially at a time of high inflation, a high public debt level makes the country economically vulnerable. That is because we have become the world’s largest debtor nation. For many years now, we have relied on the kindness of strangers in general and on the Chinese and Japanese in particular to finance our budget excesses.

If foreigners begin to perceive that we are in the process of inflating away our debt, they will be reluctant to hold that debt and will demand higher interest rates in order to compensate them for inflation risk. That in turn could cause the dollar to swoon, which would only add to inflationary pressures and fuel further concerns about our wanting to inflate away our debt.

$30 Trillion Debt

Alan Rappeport at NYT:

America’s gross national debt topped $30 trillion for the first time on Tuesday, an ominous fiscal milestone that underscores the fragile nature of the country’s long-term economic health as it grapples with soaring prices and the prospect of higher interest rates.

The breach of that threshold, which was revealed in new Treasury Department figures, arrived years earlier than previously projected as a result of trillions in federal spending that the United States has deployed to combat the pandemic. That $5 trillion, which funded expanded jobless benefits, financial support for small businesses and stimulus payments, was financed with borrowed money.

Budget Update

From the Congressional Budget Office:

In CBO’s budget projections (called the baseline), the federal budget deficit for fiscal year 2021 is $3.0 trillion, nearly $130 billion less than the deficit recorded in 2020 but triple the shortfall recorded in 2019. Relative to the size of the economy, this year’s deficit is projected to total 13.4 percent of gross domestic product (GDP), making it the second largest since 1945, exceeded only by the 14.9 percent shortfall recorded last year. The economic disruption caused by the 2020–2021 coronavirus pandemic and the legislation enacted in response continue to weigh on the deficit (which was already large by historical standards before the pandemic).

Baseline deficits under current law are significantly smaller after 2021 and average $1.2 trillion from 2022 to 2031. They average 4.2 percent of GDP through 2031, well above their 50-year average of 3.3 percent. In CBO’s projections, the deficit declines to about 3 percent of GDP in 2023 and 2024 before increasing again, reaching 5.5 percent in 2031 (see Table 1). By the end of the period, both primary deficits (which exclude net outlays for interest) and interest outlays are increasing in nominal terms and as a share of GDP.

With such deficits, federal debt held by the public—which stood at $21.0 trillion, or 100 percent of GDP, at the end of 2020—would total $23.0 trillion, or 103 percent of GDP, at the end of 2021. As recently as 2007, at the start of the previous recession, federal debt equaled 35 percent of GDP. Projected federal debt dips just below 100 percent of GDP between 2023 and 2025 before rising again, reaching 106 percent in 2031, about the same as the amount recorded in 1946, which stands as the highest in the nation’s history.

Revenues in CBO’s baseline increase to 17 percent of GDP in 2021 and are relatively stable thereafter, averaging 18 percent from 2022 through 2031. Outlays are projected to decline from 31 percent of GDP this year to about 21 percent from 2023 through 2025 as pandemic-related spending wanes and low interest rates persist. Outlays then increase relative to GDP, owing to rising interest costs and greater spending for major entitlement programs.

Compared with its estimates from February 2021, CBO’s estimate of the deficit for 2021 is now $745 billion (or 33 percent) larger, and its projection of the cumulative deficit between 2022 and 2031, $12.1 trillion, is now $173 billion (or 1 percent) smaller. In 2021, recently enacted legislation—primarily the American Rescue Plan Act of 2021 (Public Law 117-2)—increases the projected deficit by $1.1 trillion, mostly as a result of higher spending. The largest budgetary effects stem from additional funding for recovery rebates for individuals, for state and local governments, for educational institutions, and for an extension of expanded unemployment compensation. The effects of a stronger economy as well as technical changes (that is, changes that are neither legislative nor economic) partially offset the deficit effects of recently enacted legislation. For subsequent years, CBO has increased its projections of both revenues and outlays—the former by more than the latter.

Projected revenues over the next decade are now higher because of the stronger economy and consequent higher taxable incomes. In addition, tax collections in 2020 and 2021—particularly amounts collected from individual income taxes—were stronger than the amounts implied by currently available data on economic activity and the past relationship with revenues. In CBO’s projections, that unexpected strength dissipates over the next few years. Besides resulting from the direct effects of recent legislation, the changes to outlays since February over the projection period are largely attributable to higher interest rates (which boost net interest costs) and higher projected inflation and wages (which increase the costs of major benefit programs).

CBO’s projections are constructed in accordance with the Balanced Budget and Emergency Deficit Control Act of 1985 (P.L. 99-177) and the Congressional Budget Act of 1974 (P.L. 93-344). Those laws require CBO to construct its baseline projections under the assumption that current laws governing revenues and spending will generally stay the same and that discretionary appropriations in future years will match current funding, with adjustments for inflation.2

CBO’s baseline is not intended to provide a forecast of future budgetary and economic outcomes; rather, it provides a benchmark that policymakers can use to assess the potential effects of future policy decisions. Future legislative action could lead to markedly different outcomes. Even if federal laws remained unaltered for the next decade, actual budgetary outcomes would probably differ from CBO’s baseline—not only because of unanticipated economic developments, but also as a result of many other factors that affect federal revenues and outlays.

Deficit and Debt, Then and Now

Many posts have discussed the deficit and the debt.  Policymakers and the general public have tended to ignore these problems in recent years, 

 In 1994, President Clinton named Bob Kerrey and John Danforth to lead a bipartisan commission on entitlements and tax reform.  It made little headway.  They write at WSJ:

But there was near unanimity within the commission on the scale of the problem. Entitlements were on an unsustainable trajectory. They consumed an ever-growing share of federal spending. In 1994 the budget deficit was $203 billion (2.8% of gross domestic product), and the national debt was $3.4 trillion (47.8% of GDP).

The crisis we identified 27 years ago seems negligible given where the debt stands today. The nonpartisan Congressional Budget Office estimated in January 2020 that annual budget deficits will exceed $1 trillion, and that the debt—then hovering at $17.2 trillion—would more than double as a share of the economy over the next 30 years. These numbers don’t take into account $65 trillion of unfunded liabilities for Social Security and Medicare. The CBO now projects that, under current law, the deficit will reach $1.9 trillion in 10 years and the debt will skyrocket from 102% to 202% of GDP within 30 years.

The words “current law” are critical as the CBO forecasts only what will happen should government make no changes in spending and tax policies. But President Biden has already proposed $5 trillion in additional spending over the next 10 years, much of it for new or expanded entitlements, labeled “infrastructure” and “investment.”

Beyond the numbers, the biggest difference between then and now is that in 1994 both parties worried about deficits and debt. Today, neither Democrats nor Republicans seem to care. Under President Trump, the national debt grew from 76% of GDP to 100%. Under Mr. Biden’s first budget proposal, the debt is expected to reach 117% of GDP by 2031.

While politicians in both parties toss fiscal restraint to the winds, the good news is that a hefty proportion of voters are still concerned about the debt. An Ipsos poll conducted April 23-26 found that 75% of respondents believe too much debt can hurt the economy.

Current figures suggest that the federal government is digging America into a hole. According to CBO’s baseline projections—which don’t account for Mr. Biden’s proposals—interest costs will surpass spending for Social Security by 2045 and will consume nearly half of federal revenue in 2051.

Despite the urgency of the problem, nearly every elected official in Washington is an original co-sponsor of the “do nothing” plan. While today’s hyperpartisan political environment makes it unlikely that our fiscal crisis will be resolved anytime soon, elected officials would do well to take at least some action to address the issue.