Some Background

The Congressional Budget Office (CBO) has been making periodic long-run budget projections since the 1990s. Since then, policies have changed—as have the economic and demographic assumptions underlying the analysis. But the lesson from these projections has remained the same: the United States is on an unsustainable fiscal path. That is to say, if policies are not reformed, the public debt will likely continue to grow faster than the economy.

Causes of rising public debt

The most important underlying cause of our rising public debt is population aging. The result is pressure on Social Security, the largest program in the budget, and on Medicare and Medicaid, the largest health insurance programs. Life expectancy has typically increased steadily over time (interrupted by unfortunate declines in the mid-2010s), and current age demographics are well known. More difficult to forecast are birth rates and growth of the taxpaying population, but birth rates have remained low for a long time with no surprises.

Per person health costs have risen faster than incomes, after adjusting for the population aging that has driven the projected rise in total spending. But this “excess cost growth” is difficult to forecast. After constituting most total health cost growth for decades, excess cost growth slowed abruptly in the 2000s. And no one knows whether the slowdown will last or will be a one-time phenomenon.

Structural changes in the delivery of health care may hold down cost growth in the long run. On the other hand, excess cost growth might resume at historically familiar rates. In recent long-run projections, CBO has assumed that excess cost growth will indeed resume, but at a rate lower than the historical average.

Major disruptions to the growth rate of public debt

With Social Security and major health programs expected to grow faster than the economy and tax revenues, the deficit and public debt are expected to grow faster as well. Interest on the debt would become a growing part of the budget if interest rates stabilize or increase. Over the twenty or so years that CBO has been making long-term budget projections, this basic story has held true. But four major surprises have caused the debt-GDP ratio to rise more slowly than predicted in some periods and faster in others.

The most important surprise slowing the growth of the debt-GDP ratio has been interest rates falling dramatically during and after the Great Recession. Despite a rise in the debt-GDP ratio from 39 percent in 2008 to 74 percent in 2014, interest payments on the debt actually fell! As of mid-2020, 10-year Treasury rates were near record lows. If they persist, such low rates will limit growth of interest payment in coming years. The second surprise involved a surge in revenues related to the dot-com boom of the 1990s. It caused the debt-GDP ratio to fall from the mid-1990s to 2001, when the ratio was supposed to rise according to all long-term projections. The third surprise was the Great Recession that caused the debt-GDP ratio to rise far faster than could be explained by the increase in Social Security and health programs. Finally, the economic hit from the COVID-19 crisis and associated policy responses in 2020 led to an enormous increase in debt relative to GDP.

Despite the two big surprises that made the long-term outlook appear better than expected and the two surprises that made it look worse, the fundamentals of long-term projections have held true. Social Security and health programs have been on a strong upward trend propelled by aging and health costs, and there is little reason to expect this trend to evaporate. Absent policy changes, increased spending on those programs will likely push up the debt faster than the economy in coming years.

Updated May 2020