CBO 2021 Budget Outlook Stirs Debt, Inflation Concerns

March 30, 2021 by Reece Nations
Sun shines on the U.S. Capitol dome, Tuesday, March 2, 2021, in Washington. (AP Photo/Patrick Semansky)

WASHINGTON — The Congressional Budget Office released its long-term budget outlook last week projecting federal debt held by the public will exceed the nation’s gross domestic product by the year’s end. 

The CBO painted a complicated picture in its analysis as the non-partisan agency predicts the federal deficit will drop to $2.258 trillion from last year’s mark of $3.132 trillion. That figure excludes the recently passed American Rescue Plan Act of 2021, which is expected to add to the country’s deficit and debts although parts of the bill are not yet final. 

The deficit in 2021 is expected to be the nation’s second-largest since 1945 at 10.3% of GDP, beaten only by the 14.9% budget shortfall exacerbated by the onset of the COVID-19 pandemic in 2020. Federal debt is expected to reach 102% of GDP at the end of 2021 before swelling to 107% in 2031 almost doubling to 202% by 2051. 

“Debt that is high and rising as a percentage of GDP boosts federal and private borrowing costs, slows the growth of economic output, and increases interest payments abroad,” the report says. “A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the U.S. dollar, making it more costly to finance public and private activity in international markets.” 

Higher debt combined with a multitude of economic externalities brought on by stimulus legislation could lead to rising inflation rates, threatening the U.S. dollar’s role in global financial markets as the world’s predominant currency. The CBO’s estimates “are subject to considerable uncertainty,” meaning the timing and likelihood of the long-term consequences are impossible to predict precisely. 

Although spending associated with the pandemic is expected to decline in the near-term, spending as a percentage of GDP is projected to rise in most years that follow, according to the analysis. Similarly, revenues are expected to rise once pandemic-induced economic disruptions subside. 

Should the current laws governing spending and taxes remain largely the same, the federal debt would hold steadily above 100% of GDP through 2028 before climbing further. Currently, CBO projects the nation will hit its highest debt level in history by 2031.

“With growing debt and rising interest rates, net spending for interest more than triples relative to the size of the economy over the last two decades of the projection period, accounting for most of the growth in total deficits,” the report says. “Another significant contributor to growing deficits is the increase in spending for Social Security [mainly owing to the aging of the population] and for Medicare and the other major health care programs [because of rising health care costs per person and, to a lesser degree, the aging of the population].” 

Average deficits over the past half-century have steadily hung around 3% of GDP, but federal deficits are forecasted to grow from 5% of GDP in 2030 to 13% by 2050, TWN previously reported. But the federal deficit was always expected to grow, even before Congress passed its first multi trillion-dollar stimulus bill in March 2020. 

The CBO previously predicted federal debt would reach 180% of the nation’s GDP by 2050, which was amended to 195% shortly after passage of the first stimulus package. In addition, TWN previously reported the office estimated the U.S. economy will return to its pre-pandemic level by mid-2021 despite the expectation that employment levels will not fully bounce back until 2024. 

In September 2020, CBO projected the effects of pandemic-related losses in productivity would cause economic output to remain well below its potential level over the next several years. In its longer-term predictions, CBO forecasted the stimulus bill would raise borrowing costs and reduce the average income of U.S. households and businesses in addition to lowering economic output. 

“Because future economic conditions are uncertain and budgetary outcomes are sensitive to those conditions, CBO analyzed how those outcomes would differ from its projections if productivity growth or interest rates were higher or lower than the agency expects,” the report states. “Even if economic conditions were more favorable than CBO currently projects, debt in 2051 would probably be much higher than it is today.” 

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