- According to the Congressional Budget Office (CBO), debt held by the public will reach 195% of gross domestic product in 2050, 15 percentage points higher than what the agency predicted in its January estimate.
- The pace of expected debt accumulation follows previous estimates, but the large federal borrowing due to the COVID-19 pandemic has significantly increased existing federal debt.
- In the near future, stabilizing the debt will require unprecedented fiscal consolidation.
The long-term fiscal outlook
The Congressional Budget Office (CBO) released its update Long-term fiscal outlook and forecast that US debt will essentially double as a percentage of the economy by 2050, from the current level of 98% to 195% of gross domestic product (GDP). Although the trajectory of expected debt accumulation is similar in many ways to the previous Long-Term Outlook – the level Debt as a percentage of GDP is significantly higher than expected due to the significant deterioration in the country’s fiscal outlook due to the COVID-19 pandemic.
While in January the CBO estimated that the debt would reach 180% of GDP by 2050, the CBO now predicts that the debt held by the public will reach 195% of GDP by then, essentially double the projected size. of the American economy in the middle of the 21st century. The pace of debt accumulated over the long-term horizon – beyond the 10-year fiscal window – essentially follows earlier estimates.
In the medium term, the increase in projected deficits necessarily reflects the economic and federal response to the pandemic, which, according to the CBO, will increase the deficit of $ 2.6 trillion over the period 2020-2030. But in the longer term, the debt outlook remains determined by demographics (which has not changed since the last Long Term Fiscal Outlook), the country’s main compensation programs (which also remain unchanged) and the economy. growing interest in debt portfolios.
The long-term outlook reaffirms a trend in the country’s finances, as shown in Figure 2. Despite the continued decline in interest rates, debt servicing costs will outpace other federal spending, and in 2043 these costs will exceed all other discretionary programs – defense, education, infrastructure – combined.
The CBO also calculated what is essentially the cost of postponing the necessary fiscal consolidation, shown in Figure 3. To maintain the debt held by the public as a percentage of GDP at current levels, 100%, in 2050 would require a annual reduction (compared to CBO projections) of the primary deficit (an increase in revenue, a decrease in expenditure, or both, excluding net interest) of 2.9% if it is started in 2025. This amount rises to 598 billion dollars in 2020. Achieving the same level of debt in 2050 would require much more fiscal consolidation if postponed to 2030 or 2035.
The same story is true if the United States returns to its 2019 debt level of 74% of GDP. It would require annual savings of 3.6% if launched in 2025, but 4.4% if launched in 2030. In both cases, achieve the deficit reduction needed to meet debt targets modest enough in 2050 would be difficult if started now, but would be more than 50 percent more painful if delayed for 10 years. For context, the magnitude of fiscal consolidation envisioned in any of these scenarios dramatically overshadows all but one. historic tax increase. In essence, this challenge would require deliberate fiscal consolidation on an unprecedented scale.