The Federal Budget Outlook: Even Crazier After All These Years

We examine the budget outlook, given new Congressional Budget Office (CBO) projections that reflect the recently enacted tax bill and spending deals. The prospect of routine trillion-dollar deficits has dominated public response to CBO’s report, but the underlying problem is even more serious. First, the projections assume that the economy is at full employment, on average, over the next decade. If (when?) we face a recession, the medium-term fiscal outlook may look significantly worse. Second, under a “current policy” scenario similar to CBO’s alternative fiscal scenario – in which policy makers routinely extend temporary provisions – we project a debt-GDP ratio of 106.5 percent in 2028, which would be the highest ratio in U.S. history. This compares to CBO’s current-law debt-GDP projection of 96 percent in that year. Third, the situation only gets worse after the first decade. Under current policy, we find that to ensure the debt-GDP ratio 30 years from now does not exceed the current ratio would require a combination of immediate and permanent spending cuts and/or tax increases totaling 4.0 percent of GDP. This represents about a 21 percent cut in non-interest spending or a 24 percent increase in tax revenues relative to current levels. To put this in perspective, the 2017 tax cuts and 2018 spending deals will raise the deficit by slightly more than 2 percent of GDP in 2019. The required adjustments to keep long-term debt at its current ratio to GDP are about twice as big and in the opposite direction.