As recently as 2009, the federal deficit clocked in at $1.4 trillion, or nearly 10% of GDP; thus, the nation’s fiscal situation has improved dramatically in the past seven years, thanks to an improved economy and a combination of higher tax rates and limited spending increases driven by congressional actions like the sequester and the fiscal cliff. Some “one- time” items (e.g., the Troubled Asset Relief Program [TARP] and accounting related to Fannie Mae and Freddie Mac) also helped to reduce the deficit. But because the deficit—and the borrowing to finance the deficit—increased faster than the overall economy, the debt-to-GDP ratio deteriorated from around 52% in 2009 to just under 77% today.
A Look Ahead
Looking ahead, the CBO expects (and we concur) that under current law, the deficit relative to GDP will shrink modestly over the next three fiscal years (2017, 2018, and 2019), leaving the debt-to-GDP ratio at about 77.5%, little changed from the FY 2016 reading of around 77%. But beginning in the early years of the 2020s, the CBO expects, absent any changes to existing tax and spending laws, that the deficit will begin to widen again. By 2024 the deficit is expected to hit $1 trillion, or 4% of GDP, pushing the all-important public debt-to-GDP ratio to nearly 83% of GDP [Figure 2]. By 2026, the last year forecast by CBO’s most recent Budget and Economic Outlook published earlier this month, the deficit will reach $1.2 trillion, 4.6% of GDP, pushing the debt-to-GDP ratio to nearly 86%.
Beyond 2026, the situation deteriorates even further (again, absent changes to existing tax and spending laws). Once each year, the CBO publishes its long-term budget outlook. The most recent publication in July 2016 looked out through 2046. Again, assuming no changes to existing laws on taxes and spending,
no recessions, and a very modest path for both short- and long-term interest rates, the CBO expects the deficit to reach 8.8% of GDP by 2046, driving the debt-to-GDP ratio to 141% of GDP. At that point, interest payments, which account for just 1.4% of GDP today, would reach 5.8%, and spending on the major entitlement programs (Social Security, Medicare, Medicaid, the Children’s Health Insurance Program), and the Affordable Care Act would represent over 15% of GDP, 50% higher than today [Figure 3]. The ballooning of these demographically related portions of the budget over the next few decades highlights the structural problems in the budget, despite the relatively benign backdrop today.
