Long-Term Federal Budget Projections Look Grim
The federal government has run a budget deficit since 2001, which has contributed to the national debt and brought the federal debt-to-GDP ratio to over 100 percent, near an all-time high. If the government doesn’t deviate from its dangerous fiscal path, the outlook is grim.
The Congressional Budget Office predicts that the federal budget deficit will grow over the next 30 years because growth in spending will outpace growth in revenue. Major entitlement programs, including Social Security and Medicare, will be the main drivers of federal spending growth as the baby boomers age. The other major category that will drive growth in federal spending is interest on the national debt, in part because interest rates will likely rise in the coming years.
In 2016, spending on Social Security and Medicare exceeded 10 percent of GDP. Net interest was 1.4 percent of GDP. The federal budget deficit in 2016 was 2.9 percent of GDP. If current fiscal policy continues, by the 2040s, Social Security and Medicare will exceed 15 percent of GDP. Net interest will spike to 5.8 percent of GDP. The deficit will be around 8.8 percent of GDP.
The CBO projects that tax revenues will grow slower than spending over the coming decades. Growth in personal income tax receipts will be offset by a decline in business taxes.
As with any forecast, there is significant uncertainty surrounding the budget projections. The CBO estimates that the deficit might be moderated if economic growth accelerates. Economic growth could accelerate if capital investment leads to higher productivity. Growth could also accelerate if the population grows, through either increased fertility or immigration.
What are the likely consequences of the deterioration in the federal budget? Government debt will crowd out will crowd out private investment. Domestic and international savings can be used to finance public or private consumption. The bigger the federal deficit, the more savings the government must use. That leaves less capital available for the private sector. Less capital for private investment will stunt the economy and reduce tax revenue to an already-strapped government.
The best solution to the federal deficit and debt problem is to cut government spending. Cutting spending would pave the way for lower taxes, leaving more money for consumers to spend and more money for businesses to invest. Since economic growth is driven by the private sector, the government needs to end its budgetary woes or it will risk slow growth for years to come, similarly to many social-democratic countries in Europe.
