The 2014 Long-Term Budget Outlook

From the Congressional Budget Office

Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing its debt to soar. The total amount of federal debt held by the public is now equivalent to about 74 percent of the economy’s annual output, or gross domestic product (GDP) – a higher percentage than at any point in U.S. history except a brief period around World War II and almost twice the percentage at the end of 2008.

 

If current laws remained generally unchanged in the future, federal debt held by the public would decline slightly relative to GDP over the next few years, CBO projects. After that, however, growing budget deficits would push debt back to and above its current high level. Twenty-five years from now, in 2039, federal debt held by the public would exceed 100 percent of GDP, CBO projects. Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.

What Is the Outlook for the Budget in the Next 10 Years?

The economy’s gradual recovery from the 2007–2009 recession, the waning budgetary effects of policies enacted in response to the weak economy, and other changes to tax and spending laws have caused the deficit to shrink this year to its smallest size since 2007: roughly 3 percent of GDP, compared with a peak of almost 10 percent in 2009. If current laws governing taxes and spending stayed generally the same—an assumption that underlies CBO’s 10-year baseline budget projections—the anticipated further strengthening of the economy and constraints on federal spending built into law would keep deficits between 2½ percent and 3 percent of GDP from 2015 through 2018, CBO estimates.

In succeeding years, however, deficits would become notably larger under current law. The pressures stemming from an aging population, rising health care costs, and an expansion of federal subsidies for health insurance would cause spending for some of the largest federal programs to increase relative to GDP. Moreover, CBO expects interest rates to rebound in coming years from their current unusually low levels, raising the government’s interest payments. That additional spending would contribute to larger budget deficits—equaling close to 4 percent of GDP—toward the end of the 10-year period spanned by the baseline, CBO anticipates. Altogether, deficits during that 2015–2024 period would total about $7.6 trillion.

With deficits expected to remain close to their current percentage of GDP for the next few years, federal debt held by the public is projected to stay between 72 percent and 74 percent of GDP from 2015 through 2020. Thereafter, larger deficits would boost debt to 78 percent of GDP by the end of 2024.

What Is the Outlook for the Budget in the Long Term?

CBO has extrapolated its baseline projections through 2039 (and, with even greater uncertainty, through later decades) by producing an extended baseline that generally reflects current law. The extended baseline projections show a substantial imbalance in the federal budget over the long term, with revenues falling well short of spending (see the figure below). As a result, budget deficits are projected to rise steadily and, by 2039, to push federal debt held by the public up to a percentage of GDP seen only once before in U.S. history (just after World War II). The harm that such growing debt would cause to the economy is not factored into CBO’s detailed long-term projections but is considered in further analysis presented in this report.

Federal spending would increase to 26 percent of GDP by 2039 under the assumptions of the extended baseline, CBO projects, compared with 21 percent in 2013 and an average of 20½ percent over the past 40 years. That increase reflects the following projected paths for various types of federal spending if current laws remained generally unchanged (see the figure below):

• Federal spending for Social Security and the government’s major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through the exchanges created under the Affordable Care Act—would rise sharply, to a total of 14 percent of GDP by 2039, twice the 7 percent average seen over the past 40 years. That boost in spending is expected to occur because of the aging of the population, growth in per capita spending on health care, and an expansion of federal health care programs.
• The government’s net interest payments would grow to 4½ percent of GDP by 2039, compared with an average of 2 percent over the past four decades. Net interest payments would be larger than that average mainly because federal debt would be much larger.
• In contrast, total spending on everything other than Social Security, the major health care programs, and net interest payments would decline to 7 percent of GDP by 2039—well below the 11 percent average of the past 40 years and a smaller share of the economy than at any time since the late 1930s.