Just as a two-year period of punishing inflation finally appears to have subsided, new projections from the Congressional Budget Office show another major economic problem on the rise. Thanks to excessive deficit spending that worsened inflation and the aggressive interest-rate hikes implemented by the Federal Reserve to bring it under control, the U.S. government is now on track to spend a larger share of economic output on annual interest payments next year than at any other point in our nation’s history.
Even worse, these costs are projected to more than double over the next 30 years if current law remains unchanged. And the worst part of all: CBO’s projections are more likely than not to deteriorate further based on the agendas being offered by the two major parties heading into the 2024 elections.
CBO’s Budget and Economic Outlooks have shown for years that government debt was on an unsustainable path. As our population ages, spending on retirement programs such as Social Security and Medicare is growing faster than the revenue needed to fund them. If the federal government continues relying on borrowed money to finance growing structural deficits, an ever-growing share of the federal budget will be spent just servicing past debts. That rising cost draws resources away from other critical public investments our government needs to fund and threatens to dampen economic growth.
Previous reports generally suggested this challenge was a long-term one: Just last summer, CBO estimated that annual interest payments as a percent of gross domestic product would remain below the all-time high they reached in 1991 until 2030. But thanks to an unforeseen spike in borrowing costs last fall, CBO now expects the previous record to be broken in 2025.
The sharp change is a reminder that even small changes in interest rates can lead to large changes in how much it costs annually to service a national debt that’s greater than the total value of all goods and services produced by the U.S. economy in a year. And if the federal government continues borrowing at the rate CBO projects, annual interest payments are on track to double their historical high and eventually surpass Social Security as the single largest line item in the federal budget by 2050. Given these figures, it makes perfect sense that Federal Reserve Chair Jay Powell recently said it was “urgent” to address the unsustainability of our debt.
There were two measures by which the outlook nominally seemed to improve, but unfortunately, neither is cause for celebration. The first change is that CBO now projects discretionary spending — the part of the budget annually appropriated by Congress — to fall to 5.1% of GDP over the next 10 years, as opposed to the 6.0% of GDP projected before the passage of the Fiscal Responsibility Act. That would leave discretionary spending at its lowest level in modern history, which is particularly problematic because that part of the budget is what funds most public investments in education, infrastructure, and scientific research that lay the foundation for economic growth. Falling discretionary spending levels also leave the next generation of policymakers with less say over how their constituents’ tax dollars will be spent than their predecessors, limiting their ability to respond to emergencies or other unforeseen needs.
The second major change in CBO’s analysis is that it projects $7 trillion in additional economic output over the next decade, leading to $1 trillion of higher revenue, than its estimate from last year. That’s ostensibly great news, but the cause of this unexpected boom is a recent surge in immigration that lawmakers just spent four months negotiating how to reverse on a bipartisan basis. This dynamic presents both a political and a policy problem: On the one hand, young immigrants strengthen public finances by providing new working-age taxpayers who help offset our domestic demographic challenges. On the other hand, a permissive attitude toward rising illegal immigration undermines the rule of law and is deeply unpopular — particularly with the working-class swing voters most likely to decide the 2024 election.
Unfortunately, both of the two major political parties’ presumptive nominees currently seem more likely to make the fiscal outlook worse than better. When he was in the White House, former President Donald Trump signed into law a package of unaffordable tax cuts and spending increases that added $8.4 trillion to the national debt over the following decade — more than half of which he signed into law before the Covid-19 pandemic. Many of those tax cuts are currently scheduled to expire in 2025, but Trump is campaigning on making them permanent. If he’s successful, that would add another $3 trillion to the debt not currently accounted for in CBO’s projections. Trump also ruled out making any changes to Social Security or Medicare benefits and wants to pursue draconian immigration restrictions that go far beyond the compromise border security bill he sabotaged this week, all of which would only compound the fiscal challenge.
President Joe Biden has similarly pledged not to reduce Social Security or Medicare benefits and to extend Trump’s tax cuts for households making less than $400,000 per year, which would cost $1.7 trillion. Perhaps Biden’s biggest obstacle is his refusal to soften a pledge he made not to raise any tax on any household making less than $400,000. As a report I published last month explains, this pledge takes tax increases on 98% of American households — and on one-third of the total income earned by households with annual incomes higher than $400,000 — off the table. It would thus be mathematically impossible to stabilize the debt and pursue anything resembling Biden’s domestic spending agenda under such constraints.
Fortunately, there seems to be growing interest in Congress and among the electorate for tackling the problems identified in CBO’s new report. Momentum has been building in both the House and Senate for the Fiscal Stability Act, a bipartisan proposal to establish a fiscal commission tasked with producing recommendations for stabilizing the debt outlook. The bill received a markup in the House last month and could be attached to government funding bills in the coming weeks. Voters also seem to be on board, with recent polling showing more than 90% of Democrats, Republicans, and independents support establishing a fiscal commission.
Passing the Fiscal Stability Act would be a good first step, but it would only create a forum for dialogue. Up until now, voters and policymakers alike have been unwilling to make the hard choices necessary to reconcile America’s tax and spending priorities even when presented with such opportunities. The result is that the U.S. government is about to spend a higher share of our national income servicing past debts than at any point in history. Policymakers must stop putting the problem off or it will only keep getting worse.
PPI policy analysts Laura Duffy and Alex Kilander contributed to this analysis.
