This week, the Congressional Budget Office (CBO)The Congressional Budget Office (CBO) provides nonpartisan analysis to the U.S. Congress on federal economic and budgetary matters. released the 2018 Long-Term Budget Outlook. The CBO projects that over the next 30 years, government spending will grow faster than government revenues, leading to an increase in debt that could surpass 150 percent of GDP by 2048. Three highlights of the report are:
Federal debt is projected to increase sharply over the next 30 years
The CBO projects that deficits would rise from 3.9 percent of GDP in 2018 to 9.5 percent in 2048. This structural imbalance would lead to federal debt held by the public rising from a projected 78 percent of GDP this year to 152 percent of GDP by 2048. This is significantly higher than the average over the past 50 years (41 percent of GDP) and higher than the peak of 106 percent of GDP recorded in 1946.
Debt is projected to grow because the gap between spending and revenue will continue to increase
The CBO projects revenues to increase from their current level of 16.6 percent of GDP to 19.8 percent of GDP by 2048, above the 50-year average of about 17 percent of GDP. These revenue levels assume that current laws will remain unchanged, including the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. cuts in the Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. expiring as scheduled after 2025, and that certain taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es from the Affordable Care Act will go into effect in 2022. Revenues also increase because the TCJA permanently changed the measure used to index tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s, and incomes are projected to grow faster than inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. .
Even though revenues are projected to grow faster than GDP, spending is projected to grow even faster. Federal spending today is 21 percent of GDP, and the report shows that increasing to 29 percent of GDP by 2048, also above its 50-year average (20 percent). These spending increases occur primarily because spending as a share of GDP would increase for Social Security, the major health-care programs, and interest on government debt.
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The effects of the TCJA on the long-term budget outlook
The long-term projections include prior CBO estimates that the TCJA would increase investment, employment, and output, offsetting an estimated $571 billion of the law’s costs. The CBO estimates with this macroeconomic feedback, the TCJA will increase the deficit by $1.854 trillion (including interest expense) over the 2018-2028 period. After scheduled expirations take place, though, the CBO notes, “Despite that uncertainty, the overall effects of the permanent provisions of the act, including their macroeconomic feedback, are projected to reduce the primary deficit somewhat from 2029 to 2048.” If Congress were to extend the individual income tax cuts, the long-term impact would change.
Overall, the report projects that increases in spending, driven by an aging population and rising health-care costs, will grow faster than revenues, and lead to structural imbalances in the federal budget. Both spending and revenue as a share of GDP are projected to be larger than their 50-year averages, and federal debt held by the public is projected to reach 152 percent of GDP by 2048. The report cautions that the longer lawmakers wait, the greater policy changes would need to be to reach any particular goal for federal debt.