On Wednesday, the Congressional Budget Office (CBO) released its annual analysis of the budget and economic outlook over the coming decade. For anyone with a realistic sense of budgets and fiscal responsibility (i.e., not most Democrats), the lengthy document made for bracing reading.
As bad as you think the budget situation is, CBO noted that in the past year, it has gotten much worse. And if Democrats have their way when it comes to fiscal policy, things will still somehow worsen.
Spending Blowouts Increase the Deficit
CBO demolished two fictions that President Biden tried to peddle in his State of the Union address regarding the nation’s fiscal standing. In his speech, Biden claimed that deficits have gone down under his watch — a claim based largely on the fact that members of his own party rejected the full $5 trillion Build Back Bankrupt spending blowout he proposed.
Nevertheless, CBO estimated that the federal deficit would increase by $34 billion this year compared to last year. The budget office also noted that the deficit increase this year “would be larger if not for a shift in the timing of certain payments,” as some payments will get shifted because this fiscal year ends on a Saturday.
Over the longer term, Appendix A at the end of the report demonstrated how badly the nation’s financial standing has deteriorated under this president. Specifically, the estimated 10-year deficit has increased by $3.1 trillion, or nearly 20 percent, just since last May. Most of the increase stems from two sources.
Legislative changes accounted for a net increase in the deficit of nearly $1.5 trillion. The “burn pit bill” providing new benefits to veterans — which was not paid for — plus Democrats’ partisan reconciliation bill and last December’s omnibus spending bill blowout collectively account for the vast share of this deficit increase.
Economic changes account for another nearly $1.2 trillion of the deficit increase. Higher inflation will generate more than $900 billion in new revenue as individuals and corporations get pushed into higher tax brackets — but inflation will also cause $2.1 trillion in additional spending on higher Social Security benefits, Medicare and Medicaid benefits, federal pensions, and other similar programs, more than wiping out any budgetary savings from the increase in tax revenue. In other words, thanks to spending by congressional Democrats and loose monetary policies by the Federal Reserve over the last several years, the American people will suffer both higher taxes and higher deficits.
Biden claimed in his speech to Congress that his budget, due for public release on March 9, “is going to cut the deficit by … $2 trillion.” The CBO report demonstrated how such an amount of deficit reduction wouldn’t even undo the deterioration of the country’s fiscal position over the past nine months, let alone the problems incurred before then.
Historically High Deficits
The report also highlighted how deficits and debt have risen to historically high levels. Similarly, now that the Federal Reserve has (finally) raised interest rates after printing trillions of dollars during the pandemic, interest costs are quickly rising to stratospheric levels.
Over the next 10 years, deficits will average 6.1 percent of GDP, nearly double the 3.6 percent average deficit over the last half-century. Net interest costs are set to double in raw dollar terms between now and 2028. They will exceed federal spending on the Medicaid program this year and, by 2033, will reach $1.4 trillion — nearly the cost of the entire Medicare program.
Over the coming decade, the primary budget deficit — that is, the budget deficit exclusive of interest spending — will average 2.9 percent of the economy. By comparison, the CBO notes, “in the 62 years from 1947 to 2008, such deficits exceeded 2.5 percent of GDP only twice.” In other words, even if high-interest costs disappeared (and they won’t), we would still have serious structural problems that need addressing.
It is worth noting, CBO estimates that in 2022 individual income tax receipts totaled 10.5 percent of GDP, which was “the highest those receipts have been in relation to the size of the economy since the 16th Amendment authorizing the federal government to collect income taxes was ratified in 1913.” Remember, too, that on a going-forward basis, the estimates in CBO’s baseline assume that all the provisions of the Trump-era tax law expire in 2026 as scheduled.
After Americans paid the greatest amount of individual income taxes ever in 2022, they will, according to CBO’s projections, incur another major tax increase in a few short years. Yet the budget office concludes that we will still suffer historically high deficits going as far as the eye can see. Translation: Our government doesn’t have a revenue problem — it has a spending problem.
Still Too Optimistic?
Dire as they are, some might argue that the CBO’s estimates still understate the depth of the problem, particularly in the short term. The budget office estimates that the Federal Reserve will reduce interest rates by later this year, which is sooner than all the projections made by Federal Reserve officials in their most recent estimates last December. CBO also predicts that the Fed will lower interest rates this year even as it projects that inflation will not reach the Fed’s desired 2 percent target until 2027 — four years from now.
These estimates run two risks: If the Fed does not cut interest rates as CBO projects later this year, net interest rate costs will rise even faster than the budget office estimates. Conversely, if the Fed does cut rates this year, but inflation lingers as CBO estimates, the Fed might have to engage in a second round of interest rate increases in 2024 or future years to slay the interest rate dragon once and for all. Either scenario would raise net interest rate costs to the Treasury and worsen our fiscal situation.
As it is, however, the current CBO baseline should provide more than enough warning for our politicians to get about fixing the mess they have created over the last several decades. All it takes is the (heretofore lacking) political will to cut spending so our nation finally begins to live within its means.