CBO Projections Likely Underestimate Future Debt Load

CBO's forecast should raise alarms, but without significant reform, there are factors that could drive debt higher than projected.
Demian Brady
July 6, 2017

The Congressional Budget Office (CBO) recently published An Update to the Budget and Economic Outlook: 2017 to 2027. The purpose of the report is to revise its baseline projection of federal spending and revenues for the next ten years using the latest economic and budgetary data. CBO is required to produce the report using an assumption that current laws on taxes and outlays will generally remain unchanged. Under this scenario, CBO projects that federal debt will grow by $11 trillion over the next ten years. Even though the baseline is intended “to provide a neutral benchmark that policymakers can use to assess the potential effects of policy decisions.” By any measure, the report should serve as a resounding alarm about the long-term fiscal imbalance. Barring significant reforms, there are several factors that will likely drive the debt even higher than CBO projected.   

Last January, CBO projected that the debt would rise to $24.9 trillion in 2027, comprising 88.9 percent of GDP. The forecast has been downgraded in the new report to $25.5 trillion, and over 91 percent of the economy. Under current law, tax receipts will continue to fall short of rising obligations for entitlement programs. Annual deficit spending and rising interest rates will increase net payments on the federal debt, which will more than triple in size in ten years from $269 billion to $818 billion. Without a significant turnabout in fiscal policy, there are good reasons to expect that the actual debt ten years out will be higher than CBO projects: 

  • The Foundation for Economic Education reviewed two decades worth of CBO debt projections and found that every single one underestimated long-term debt.  
  • Under current law, defense outlays are constrained under sequestration caps through 2021. But it is likely these limits on spending will be repealed, adding $469 billion to the budget over the next decade.  
  • CBO’s estimates of short- and long-term interest rates are slightly higher than foreseen in January, but if they rise faster than expected, the costs to service the debt would be significantly higher. As CBO notes, the Blue Chip consensus (based on projections by a private-sector economists) sees interest rates rising higher than CBO.  
  • Predicting economic downturns, natural disasters, or significant military conflicts is outside the scope of CBO’s budget outlook, but such unexpected emergencies would add to the fiscal crunch.  
  • Freedom Partners (FP) observed that CBO’s long-term report does not include the intragovernmental debt in its calculation. This is the amount of money the government owes itself as money is borrowed from federal funds and accounts that are in surplus, and used to finance spending in accounts with shortfalls. In 2016, FP applied totals of intragovernmental debt available in CBO’s ten-year budget outlooks and estimate that total federal debt by 2046 would equal 170 percent of GDP, 23.5 percent higher than CBO’s predicts.

There is always a degree of uncertainty in budgetary and economic projections, but the trend has been for CBO to lowball its long-term debt projections. Congress and the Administration are working on a reform agenda that could boost economic growth and slow growth in annual expenditures. But, progress will ultimately depend on addressing the unfunded liabilities in the federal entitlement programs that are driving the growth in spending. 

Consensus will be required to tackle Washington’s over-spending addiction. Lawmakers looking for a place to start reaching across the aisle should turn to NTUF’s and PIRG’s Common Ground report of commonsense budget reforms.

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