CBO Projects Modest Growth and Wide Deficits
On Monday, the Congressional Budget Office (CBO) released its annual, beginning of the year update to its economic and budgetary projections, and there's not much in the report to comfort the Trump administration, or anyone else. CBO projects the economy will continue growing, but at a relatively slow pace, and the federal government will pile up debt at a rate that is well beyond the historical norm.
CBO expects the U.S. economy will grow, in real terms, at a rate of 2.3 percent in calendar year 2019, which would be down from the 3.1 percent growth rate of 2018. More troubling for the administration, CBO expects growth to slow down in 2020 to just 1.7 percent and to 1.6 percent in 2021, and to stay below 2 percent annually throughout the next decade. Between 1991 and 2008, the U.S. economy grew at an average annual rate of 3.1 percent. As growth slows, CBO expects the unemployment rate to rise, from 3.8 percent in 2018 to 4.4 percent in 2021.
The administration expects the 2017 tax law to push growth to levels well above what is projected by CBO. Last summer, the administration's mid-session budget review projected growth would be 3.2 percent in 2019 and average around 3.0 percent over the coming decade. The administration’s and CBO’s forecasts often diverge, but this is an unusually large disagreement. Someone is clearly wrong about the pace of growth over the coming years.
CBO’s budget forecast has not changed much from last year, which is to say it is filled to the brim with bad news. The federal government will run a cumulative deficit of $11.6 trillion over the ten-year period 2020 to 2029. The annual budget deficit will be about $900 billion in 2019 (after adjusting for timing shifts across fiscal years), or 4.2 percent of GDP, and will rise to 4.7 percent of GDP in 2029. From 1960 to 2008, the federal government ran an average annual budget deficit of 2.1 percent of GDP.
Government debt, which has already increased from 39 percent of GDP in 2008 to 78 percent at the end of fiscal year 2018, is expected to rise to 93 percent of GDP in 2029, and to over 150 percent of GDP in the ten-year period 2040 to 2049. In 1946, at the end of World War II, federal government had outstanding debt commitments equal to 106 percent of GDP.
The growing burden of debt is itself a primary reason for the gloomy budget forecast. As the government borrows more, it must also pay more interest on what it owes. In CBO's forecast, net interest payments on federal debt rises from $325 billion, or 1.6 percent of GDP, in 2018, to $928 billion, or 3.0 percent of GDP, in 2029.
Critics like to argue that the federal government is running large deficits because of the 2017 tax cut, but that is a flawed characterization of the current situation. The revenue effect of the tax cut is small relative to the size of the nation's fiscal problems. The Joint Committee on Taxation (JCT) projected the 2017 law would lower revenue by $0.7 trillion over the period 2020 to 2024, or about 3 percent of the pre-tax cut baseline. Moreover, federal revenue is expected to rise in coming years, in part because some of the tax cuts will expire, but also because incomes are expected to grow faster than inflation, which means many individuals will get pushed into higher tax brackets (the income thresholds for the tax brackets are generally indexed to consumer inflation, not wage growth).
CBO's forecast makes it plain, once again, that the primary source of current and future budgetary pressure is the growth of entitlement spending. Over the ten-year period 2020 to 2029, CBO expects the federal government to spend a total of $57.8 trillion, which would be an increase of $13.7 trillion over the level that would occur if spending were held constant at its 2019 level. The added spending just for Social Security, Medicare, and Medicaid, above a freeze at their 2019 levels, is expected to be $8.9 trillion, or about two-thirds of the total. In 2029, the combined spending on the three most expensive entitlement programs is projected to be 13.2 percent of GDP, up from 10.4 percent of GDP in 2019.
This latest budget forecast is near certain to get worse later this year when Congress and the president have to negotiate new caps on appropriated spending, for both defense and domestic programs. In early 2018, Congress and the president agreed to raise the caps for fiscal years 2018 and 2019, but current law still reflects the much lower limits for 2020 and 2021 that enacted in the original Budget Control Act of 2011. If these caps aren’t raised, Congress would need to find $125 billion in spending cuts in appropriated accounts for 2020, relative to the level that will be approved for 2019. There is no possibility of that happening. It is much more likely that spending in 2020 and beyond will increase at least with the rate of inflation. CBO estimates this level of spending on appropriations would add another $2.1 trillion to the government’s cumulative ten-year deficit, put the total to $13.7 trillion.
The Trump administration will argue that CBO's forecast is flawed because its growth assumptions are too pessimistic. But, as CBO notes, even if growth were more rapid, due to higher productivity or higher labor force participation by workers, it wouldn't make much of a difference. If both productivity growth and labor force growth were 0.l percentage point faster each year than CBO expects in its baseline forecast, then the overall federal deficit would decline only by about $450 billion, or 4 percent, over the coming decade.
The federal government's fiscal outlook has not been this precarious in some time, or perhaps ever. The government borrowed heavily during the 2007 to 2009 recession, and in the years that followed. But now that economic growth is close to a more normal level, the deficits still remain very high. And that’s before the full effects of population aging are felt in what is spent on the major entitlement programs.
None of this is news. CBO's projections in recent years have consistently told this same basic story. But both parties prefer to ignore reality and offer painless solutions instead. Republicans promise growth will solve the whole problem, while Democrats say the rich can be forced to pay for more government and lower deficits. Neither scenario is plausible. Which means the wait will continue for the course correction that cannot be avoided forever.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.
