On July 1st, the Congressional Budget Office (CBO) updated its ten-year outlook for the federal budget and the economy. The big takeaways? The CBO is predicting large federal deficits, a rising national debt, and slow long-term economic growth.
Could you start by explaining the federal deficit?
When a government spends more money than it takes in, it ends up with a deficit. And in terms of the federal deficit, 2020 was the perfect storm.
The economic shutdown caused by the COVID-19 pandemic meant the federal government took in less revenue. Meanwhile, the pandemic’s impact on American workers meant the need for programs like unemployment insurance was even greater.
The result? The U.S. deficit reached a record high of $3.2 trillion in 2020.
Going forward, the agency thinks we’ll see a slight improvement with a deficit around $3 trillion for 2021.
Okay, so what do deficits mean for the national debt?
When we have a large gap between what the government takes in and what it spends, we tend to fill it by borrowing money, or to put it another way, by accumulating debt.
The CBO estimates that over the next decade, federal borrowing will increase the national debt from $23 trillion to $35.8 trillion.
The more debt we take on, the more interest we’ll pay. As interest rates rise from historic lows, more and more of the federal budget will go towards paying back debt and interest instead of funding programs and priorities.
That’s a lot of spending and borrowing. Can’t we fix it by getting the economy growing?
Well, the CBO’s outlook on growth starts out positive. As the economy rebounds from the 2020 shutdown, short-term growth looks impressive. Between now and 2025, the economy is actually expected to grow by an average of 2.8%.
But according to the CBO’s predictions, after 2025, things will start to slow down again. In fact, the agency projects that economic growth in the latter half of this decade will average only 1.6%.
Why the projected slowdown in growth?
Most of it has to do with population changes. Baby Boomers continue to retire and labor force participation among younger generations remains low. That means we’ll have far fewer workers in the U.S. economy going forward.
I’ve been to a Free the Facts event, so I know that more Baby Boomers and fewer workers means funding problems for Medicare and Social Security. What does the CBO report say about that?
Good question. An update on how the pandemic’s economic fallout affected Social Security and Medicare solvency was missing from the CBO’s report. But the available data does tell us a few things.
First, in the short-term (between now and 2025), the CBO is projecting a robust economic rebound. That should put the two largest entitlement programs back on their pre-pandemic tracks. For reference, before the pandemic, Medicare’s Hospital Insurance trust fund was scheduled to go bankrupt by 2026, and Social Security’s trust funds were expected to do the same by 2035. President Biden’s proposed budget suggested that he might use general tax revenue to extend the trust funds’ lives, but we’ll have to see if Congress will agree to such an important financing change.
In the long term, we’re looking at slower economic growth. A weaker economy generally means lower payroll tax revenue since fewer people are working. And since payroll taxes are what support the solvency of Medicare and Social Security, funding for the programs will increasingly come from their trust funds and borrowing. That means the programs may reach insolvency sooner than expected.
The bottom line for the two programs is that the need for significant, bipartisan leadership is greater than ever. Without it, Social Security and Medicare will definitely reach insolvency in the next 15 years. And if the CBO is right and slower economic growth is on the horizon, both programs could face hard financial decisions even sooner.