2023 is barely half finished. Yet already we know America’s flirtation with debt default will most certainly prove to be one of the biggest news stories of the year.
The way events unfolded still may be a fresh memory for some. For others, here are the broad strokes:
In January, the federal government reached the nation’s most recent, statutorily imposed debt limit of $31.4 trillion.
Whenever that limit – also called the debt ceiling – is reached, Congress has to vote to raise it to a new height. This time, however, Republicans made it clear they wouldn’t agree to raise the limit unless spending cuts were part of the package. Democrats, led by the White House, said the limit should be raised without conditions.
The resulting standoff persisted for months. As it did, the Treasury Department relied on so-called “extraordinary measures,” including the use of readily available cash and a little clever bookkeeping, to keep the government running. But extraordinary measures cannot last forever. And when it turned out that spring federal tax receipts were lower than expected, Treasury Secretary Janet Yellen announced that “X Date,” the day the government has no choice but to default on its obligations, would arrive as soon as early June.
Both sides scrambled to put a deal together in the nick of time. The law their efforts produced is called the Fiscal Responsibility Act of 2023. The new legislation suspends the debt ceiling until the beginning of 2025 while implementing spending reductions that experts generally see as modest in scope.
Unsurprisingly, the final package generated dissent on both sides of the political dividing line. Some Republicans were unhappy with the spending cuts, which they believed to be insufficient. Some Democrats were unhappy there were any spending cuts at all.
Political leaders who saw the deal as a victory sang its praises. “We’re cutting spending and bringing deficits down,” President Biden said the day before he signed the measure into law.
On the Republican side, a group of congressional GOP leaders including House Speaker Kevin McCarthy released a statement that said, in part:
The Fiscal Responsibility Act does what is responsible for our children, what is possible in divided government, and what is required by our principles and promises. Only because of Republicans’ resolve did we achieve this transformative change to how Washington operates.
But is that really true? Has “transformative change” been realized as a result of the new law?
Perhaps not, according to the 2023 Long-Term Budget Outlook released last week by the nonpartisan Congressional Budget Office (CBO).
In the assessment of the CBO, despite the recent debt deal, the U.S. remains on course to see the portion of the federal debt held by the public rise to nearly double its economic output by 2053. The CBO also says that annual budget deficits over the next 30 years will likely average twice the percentage of gross domestic product (GDP) that they averaged over the previous half-century.
The CBO emphasizes in its report that long-term projections are not certain, and those projections could improve based on better subsequent outlooks in areas such as labor market conditions, economic output and/or demographics. On the other hand, the CBO also says that a future worsening of the outlook in these and other areas could result in even more pessimistic future fiscal projections.
In other words, according to the CBO, while the nation certainly is well-served by our avoiding default, it may be premature to interpret that development as an “all clear” on potential fiscal challenges for the nation. No one seems to be saying such challenges are right around the corner. But the CBO and others are saying a fiscal issue remains on the nation’s radar screen even though the risk of imminent default may have subsided.
The CBO’s 2023 Long-Term Budget Outlook is the agency’s first comprehensive examination of the nation’s fiscal future since the Fiscal Responsibility Act became law at the beginning of June.
As it turns out, little has changed since the CBO’s previous review in February.
Most significantly, the key figure – the ratio of federal debt (held by the public) to GDP – remains about the same. In February, the CBO projected that figure would reach 118% by 2033, and rise to 195% by 2053.
According to the CBO’s latest analysis (after the new act became law), federal debt held by the public is projected to reach 115% of GDP in 10 years, and 181% by 2053.
As for annual budget deficits, the CBO says those look like they may average 7.3% of GDP per year for the next three decades. That figure is roughly twice what it has been over the last 50 years. But the outlook for deficits maybe a little more concerning when you consider the CBO projects that deficits may grow in each of the next 30 years.
This year, CBO expects the annual budget deficit to represent slightly less than 6% of GDP; by 2053, the office projects that figure could rise to 10%. The CBO notes that the only times so far in history that annual deficits have represented 10% of GDP were as a result of the global health crisis of 2020 and World War II.
In the assessment of the CBO, “Such persistently large deficits cause federal debt, which is already high, to rise even further.” Taken together, the outlook for a combination of annual budget deficits and federal debt is such that the CBO declares that “the United States faces a challenging fiscal outlook.”
When it comes to the primary underlying drivers of potential continually increasing deficits, the CBO says there are three: interest costs associated with servicing the debt; spending on the nation’s major health care programs; and keeping Social Security funded. Currently, the CBO projects that spending in these three areas together will account for 65% of spending, overall, by 2033.
As for the direct impact of the Fiscal Responsibility Act on the nation’s fiscal profile, the CBO projects the new law will reduce budget deficits by a total of about $1.5 trillion over the next 10 years. That’s not nothing. However, deficits are on pace to average $2 trillion per year over the coming decade. Considered in such a context, more than one analyst seems to think the anticipated savings will fall short of representing the kind of “transformative change” that Speaker McCarthy and his colleagues suggest in their recent statement on the implications of the Fiscal Responsibility Act.
“If you’re worried about the deficit and debt problem,” Dennis Ippolito, a public policy professor and fiscal expert at Southern Methodist University, said recently, “this thing does nothing.”
The CBO doesn’t mince words when it comes to detailing the potential impacts the agency says could be faced eventually by the nation.
CBO Suggests America’s Current Fiscal Outlook Could Generate Consequences Similar to Those of Debt Default
“If federal debt continued to rise in relation to GDP at the pace that CBO projects it would under current law,” says the CBO, “it would have far-reaching implications for the fiscal and economic outlook.”
Among the implications suggested by the CBO are:
It is worth noting that the last implication listed here – and its associated consequences – are similar to those which numerous experts, including Treasury Secretary Janet Yellen, have said would arise from a default by the government on its debt obligations.
For example, in May, Yellen said a default would trigger an “economic and financial catastrophe” and “spark a global downturn.” And Mark Zandi, chief economist at Moody’s Analytics, said, “Global financial markets and the economy would be upended” in part because investors in America’s debt would believe “a time may come when they would not be paid what they are owed when owed it.”
The national debt was stalled at $31.4 trillion when the nation reached the debt ceiling in January. But in the short period of time since the deal to suspend the debt ceiling was reached, the gross national debt rose to more than $32.3 trillion, adding nearly another $1 trillion in that period.
For perspective, consider this: The gross national debt reached $1 trillion for the first time in October 1981. That means it took the country nearly 200 years to accumulate its first $1 trillion in debt.
Now it seems we can add that much in a matter of months.
Based on a variety of projections noted in this article – including the CBO’s – America could continue to add to its debt at a substantial pace. A number of the forecasts I included above suggest gross federal debt could reach the $50 trillion mark around the end of the decade. If it happens, it means the national debt will have grown roughly 55% in just the next seven years, or at an average pace of roughly $2.5 trillion per year.
During my research, I found that numerous analysts say the fiscal outlook resulting from this kind of debt accumulation is “unsustainable.” CBO director Phillip Swagel has said it. The Government Accountability Office has said it. Even the Treasury Department recently said it.
But as of right now, the overriding concern is that the debt balance continues to surge. And while the CBO says in its report that there’s always the possibility its concerning projections could become less concerning, the agency’s math tells us the only way that is likely to happen is with significant decreases in spending or significant increases in tax revenue. At this moment, I haven’t found any of those sorts of changes pending.
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