This is Dominic Pino filling in for Jim Geraghty. I’ll be writing tomorrow, and then Noah Rothman takes over on Wednesday and Thursday. There will be no newsletter on Good Friday.
On the menu today: Debt.
Where the Federal Budget Sees Itself in 30 Years
Each year, the Congressional Budget Office releases long-term budget projections that estimate government spending, revenue, and overall economic factors over 30 years. This year’s projections, for 2024 through 2054, came out last week. Obviously, any projections over that long a timespan should come with a grain of salt, or a whole shaker. But they are nonetheless useful for seeing how things will look if the federal government stays on its current budgetary path.
The CBO projections assume that current law will govern spending and revenue, and that the economy will remain stable over the entire window. This is of course unrealistic, but since the economy will likely underperform some years and overperform other years, the 30-year average will likely not be as far off as one might think. The more problematic part is assuming current law will continue, an issue we will come back to later.
First, let’s look at the gory details.
Deficits are projected to grow steadily over the next 30 years, reaching 8.5 percent of GDP in 2054. The CBO believes that trend will occur because spending will remain greater than revenue, and interest costs will continue to grow on top of that. Those deficits will accumulate to debt held by the public at 166 percent of GDP by 2054.
Spending will continue to grow largely due to entitlements, especially major health-care programs. The CBO assumes that budgetary shortfalls from entitlements will be made up with borrowing. The increased borrowing will put upward pressure on interest rates, increasing the costs for the government to borrow more. By 2054, the CBO projects that 23 percent of federal spending will go just to interest payments. That means 23 percent of federal spending will be financing other federal spending.
The CBO also assumes that interest rates will remain around 4 percent over the entire 30-year window. In that sense, the interest-rate projections are rosy scenarios. If interest rates rise above that, even only by one or two points, things get much worse much quicker.
The CBO also assumes that inflation will return to its long-run trend of 2 percent per year and stay there. It also assumes no major wars, no new major domestic-spending programs, and no major recessions or economic booms. These are the projections if everything goes okay for the next 30 years. That things can still look insane under those assumptions should make clear how dangerous the path of federal spending is.
Of non-interest spending, 39 percent will be just on major health-care programs by 2054. That proportion was only 28 percent this year. In 2054, 28 percent of non-interest spending will be on Social Security. Only 23 percent of non-interest spending will be discretionary.
That means before Congress even shows up to write an appropriations bill in 2054, 77 percent of non-interest spending will already be out the door. Entitlements fall under mandatory spending, which is defined by existing law and is not subject to the annual appropriations process. Congress’s budgeting power will effectively be weaker as an ever-greater proportion of federal spending is dictated by the actuarial tables rather than by legislators.
The 23 percent of non-interest spending that will still be discretionary includes most of the things that the government does, from national defense to the justice system to safety regulation to infrastructure. The budget-making process in Congress will see legislators fighting over a shrinking proportion of money to fund their priorities while the overall budget continues with massive deficits.
This is all the more concerning when you consider that the CBO projects relatively high and stable revenue over the next 30 years. “Measured in relation to the size of the economy, revenues are higher in each year after 2025 than their average over the past 50 years,” the CBO says. By 2054, revenue is projected to be 18.8 percent of GDP. This year, it’s 17.5 percent of GDP.
One of the problems with assuming current law will hold is on the revenue side. The individual provisions of the Tax Cuts and Jobs Act will expire at the end of 2025, which would increase tax rates and reduce the standard deduction. But Congress is expected to extend many of those provisions. The CBO estimates that the expiration of those provisions is doing a lot of the lifting for the projected revenue increase. If Congress extends every individual provision of the TCJA, the CBO projects revenue will be 18.1 percent of GDP in 2054 instead of 18.8 percent.
But note that that is still higher than today. And it’s still higher than the average from 1994 to 2023, which was 17.2 percent of GDP. Even with a full extension of the TCJA, the federal government will still have a larger chunk of the economy in revenue than it is accustomed to having.
The problem is mandatory spending plus interest, which is also mandatory in that Congress does not vote on making interest payments each year and the payments are defined by existing obligations (in this case, Treasury bonds). In 2054, just those two categories will be 22.5 percent of GDP, totally overwhelming the 18.8 percent of GDP in revenue. Discretionary spending is actually projected to decline as a share of the economy, from 6.4 percent of GDP this year to 4.9 percent in 2054.
The CBO uses demographic and economic projections to aid its budget projections. It projects that the U.S. population will continue to grow in each of the next 30 years, from 342 million people today to 383 million in 2054. But after 2040, that growth will be due to immigration. In that year, the number of deaths will begin to exceed the number of births in the U.S., and that trend will persist through the end of the window.
Population growth, while positive, will be much slower than it has been in the past, growing at only 0.4 percent per year. From 1994 to 2023, the American population grew at 0.8 percent per year. That makes economic growth more difficult, since the natural growth that occurs when more people make stuff will be slower. The CBO assumes real GDP growth will average 1.8 percent per year over the next 30 years. It grew at 2.4 percent per year in the previous 30 years.
The population will continue to grow older over the entire 30-year window. The share of the population over 65 will increase from 17.8 percent now to 22.3 percent in 2054. The share of the population 24 or younger will decline from 31.1 percent to 27.7 percent over the same time span.
Slower economic growth, older people, and exploding debt — that’s the baseline projection if everything goes okay for the next 30 years. The CBO is genuinely nonpartisan, especially in its long-term projections. We can’t say we weren’t warned.