US federal debt will reach a record 116% of gross domestic product by 2034, up from 93% today. That’s according to the Congressional Budget Office. As the bipartisan Washington agency tasked with being the umpire in disputes over how legislation will affect the economy, its estimates have some credibility. Or, rather, they should have some credibility.
The CBO’s economic forecasts are among the most accurate and reliable you can get. But when it comes to the federal budget, the CBO is more interested in encouraging deficit reduction than delivering accurate insight. How else to explain why over the past 50 years it has routinely overestimated the amount of interest the US government would have to pay to service its debt?
Its latest debt forecasts released earlier this month were no different, containing estimates on the likely path on interest rates that are far higher than what Wall Street and professional economists anticipate. This is important for two reasons. First, because the CBO figures suggest that from now until 2034, more than half of the government's debt accumulation will stem from interest on existing obligations. Second, the latest estimates may play a central role as the US barrels toward a partial government shutdown on March 1 if Congress is unable to agree on a spending deal.
The CBO knows that its interest rate estimates are always too high. A study it published found that from 1984 to 2021, the CBO overestimated the amount of interest the government would pay 10 years into the future by 106% on average. Looked at another way, the interest the government actually ended up paying was about half what the CBO predicted. So, why does the CBO think interest payments as a percentage of GDP will reach unprecedented levels, rising from 2.4% of GDP in 2023 to 3.9% of GDP by 2034? (The current record of 3.2% was set in 1991.) The answer is that although private-sector economists want – and need - their forecasts to be accurate if they want to keep their jobs, the CBO has another agenda.
Officially, the agency is non-partisan, and it does a pretty good job of favoring neither Democrats nor Republicans. But partisan differences don’t encapsulate every ideological divide in Congress. Plus, complaining about the deficit is a bipartisan pastime. So, by overestimating interest payments in its forecasts, the CBO provides ammunition to the deficit complainers.
Don’t get me wrong, America’s fiscal outlook is worrisome. Entitlement spending continues to make up a greater portion of the economy and federal revenue are flat by that same measure. As a result, lawmakers are under pressure to slow discretionary spending, which covers everything from grants to support scientific research to body armor to protect our military. Indeed, discretionary spending is on track to fall from 6.2% of GDP in 2024 to 5% of GDP in 2034. Cutting back on the services that most Americans expect the government to provide even as tax burdens remain the same is nobody’s idea of a good deal.
Even so, the federal government’s overall fiscal health is stable. A key measure known as the primary deficit – the deficit before adding interest payments – is actually improving. Current forecasts predict the primary deficit will narrow from 2.5% of GDP in 2024 to 2.2% of GDP in 2034. That’s just above its 2% average over the last 30 years. Crucially, 2.2% of GDP is comfortably under the 3% target that former Council of Economic Advisers Chairman Jason Furman and former Treasury Secretary Larry Summers estimated the US would need to stay below in order to keep the national debt from becoming unserviceable.
So, the next time the CBO comes out with a report that causes much handwringing over the direction of debt and deficits, take it seriously but not literally. America’s fiscal future isn’t quite as bleak as they would have you believe.
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