While policy makers and news headlines focus on debates about health care and tax policy, the U.S. fiscal outlook remains troubling and is a constraint against which new proposals should be judged. Budget deficits appear manageable in the short run but the nation’s debt-GDP ratio is already high relative to historical norms, and even under optimistic assumptions, both measures will rise in the future. Sustained deficits and rising federal debt will crowd out future investment, reduce prospects for economic growth, and impose burdens on future generations.
In a new paper, Alan Auerbach and I use the most recent projections from the Social Security and Medicare Boards of Trustees and the Congressional Budget Office (CBO) to examine the country’s fiscal future. CBO projects that the 2017 federal budget deficit will be $693 billion, or 3.6 percent of GDP, and by the end of this fiscal year, the nation’s debt will hit 77 percent of GDP. CBO says that, under current law, the deficit and debt will rise to 5.2 percent and 91 percent of GDP, respectively, by 2027.
That current-law projection assumes that Congress leaves spending and taxes unchanged over the next 10 years (other than raising the debt ceiling and reauthorizing programs). We complement CBO’s projections with “current-policy” projections that assume Congress will maintain “business-as-usual.”
What constitutes “business as usual” seems particularly uncertain at the present time, given the new Administration and the new Congress. Given that uncertainty and to maintain consistency with our prior estimates, our current policy estimates for the next decade assume similar changes to current law as in our earlier work. In particular, we ignore current law caps on discretionary spending and proposals from the Administration and Republicans in Congress to raise defense spending and cut domestic spending. We assume that over the next decade,
- defense spending grows with inflation
- non-defense discretionary spending grows with inflation and population
- mandatory spending, including Social Security, Medicare, and Medicaid, follows current law
- all temporary tax cuts or delayed tax provisions are made permanent
Under these current policy assumptions, we project that in 2027, the budget deficit will rise to 6.3 percent of GDP and the debt-GDP ratio will reach 98 percent.
Beyond 2027, we assume most categories of spending and taxes maintain their 2027 shares of GDP, that outlays and receipts for Social Security and Medicare follow the paths projected by their respective trustees, and that other health spending follows CBO projections. Under these assumptions, we project that the debt-GDP ratio will rise to 173 percent by 2047 and climb even higher in subsequent years.
Preventing those rapid increases requires major budgetary changes. For example, to hold the 2047 debt-GDP ratio to this year’s 77 percent would require a combination of immediate and permanent spending cuts and/or tax increases totaling 3.2 percent of GDP. This represents about a 16 percent cut in spending or a 19 percent increase in tax revenues relative to current levels. To return the debt-GDP ratio in 2047 to 36 percent, its average in the 50 years preceding the Great Recession in 2007-9, would require immediate and permanent spending cuts or tax increases of 4.6 percent of GDP. Delaying the necessary fiscal adjustments—or widening the gap by increasing spending or cutting taxes—would only increase the size of changes needed to hit those goals.
Our analysis shows that the nation’s fiscal situation has not improved in the last few years. Uncertainty about policies the administration and Congress will pursue only heighten concerns about the future.
