Image source: Pixabay

A partial of a nice read on the US Federal Debt which will more than likely increase as this President and Congress will wish to make Trump’s 2017 tax break passed under reconciliation permanent. The issue being, it did not promote increased revenue which would have balanced out the deficit created. It (the issue) goes much further than 2017.

The economic developments and policy changes over the past two decades have raised the level of current and projected debt. Also, one of the issues behind the upward trajectory of debt is the increasing population aging and thereby resulting in the nation’s rising health care expenditures. Without some type of balance, it is expected debt will rise above levels of historical experience resulting in economic risks due to debt. Congress should restore the balance between rising debt and increased revenues.

Introduction

The outlook for federal debt represents a significant economic challenge for the United States. Currently, federal debt stands at 98 percent of GDP, close to its highest level ever. As shown in figure 1, projections by the Congressional Budget Office (CBO) suggest that, under current law, the federal debt will reach 115 percent of GDP within the next ten years, with a further increase to about 180 percent of GDP by 2053 (CBO 2023c).

Population aging and rising health care spending are the primary factors underlying the sharp upward trajectory of debt.

Behind the projected surge in US federal debt is the expected evolution of the federal budget deficit, which is currently high and projected to rise steeply under existing law. As shown in figure 2, the budget deficit has moderated from its peak during the pandemic, but, at 5.8 percent of GDP in 2023, it is elevated by historical standards. Like debt, the budget deficit is projected to climb much higher over the next three decades, reaching 10 percent of GDP by 2053. The fundamental cause for the steep increase is that, under current law, some types of government spending will rise considerably as a share of GDP.

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The aging US population is a key factor contributing to higher projected government spending. As can be seen in figure 3, the proportion of the US population aged 65 and over has already risen from approximately 12 percent in the first decade of the 2000s to 17 percent today, with projections indicating a further increase to more than 22 percent by 2050 (CBO 2023c). The growing older population will require significant federal support for both income and health care. Sabelhaus (2022) provides a recent discussion of this issue, but as illustrated by the 1990 report of the Social Security trust fund, this point has been long understood (Social Security Administration 1990). The amount of such support will depend on the extent to which support is targeted to more needy older people or provided more broadly; that, in turn, will depend on how society prioritizes the welfare of older people relative to that of younger people as well as long-term fiscal constraints.

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The pace at which health care costs are likely to rise represents another key force pushing up projected federal spending. Growth in spending on health care per person has exceeded GDP growth per person for many years, with analysts at the Centers for Medicare and Medicaid Services (CMS) estimating an average annual “additional cost growth” (also known as “excess cost growth”) of 1.3 percent between 1985 and 2021 (Heffler et al. 2023). Although additional cost growth trended down over this period (averaging only 0.5 percent per year between 2005 and 2021) a reasonable expectation is that health care spending growth will materially outpace GDP growth in the years ahead.

Figure 4 sheds light on the quantitative importance of these factors under current law, breaking down the rise in the deficit that CBO projects over the next 30 years into its main components. The figure uses a starting point of 2024 to remove the effects of pandemic-related factors that influence the 2023 federal deficit. CBO projects that the deficit in 2024 will be 5.8 percent of GDP and that the primary deficit (the deficit excluding interest payments) will be 3.0 percent of GDP.

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The dark blue bars in the graph correspond to 2024–2053 changes in components of the primary deficit (the deficit excluding interest payments on the debt). The first two blue bars show the substantial influence of the aging population and rising health care costs. Social Security outlays are projected to rise by nearly 1 percent of GDP by 2053. Spending on major federal health care programs will rise by 3 percent of GDP. The rise in the primary deficit (the light blue bar) is not that large, at 0.2 percent of GDP, but the limited increase occurs only because of a sizable decline in noninterest spending outside Social Security and major health care programs as well as a material rise in tax revenues. These projections are consistent with current law, but, as discussed below, the potential for changes in the current law means there is upside risk on the spending side and downside risk on the tax side.

While the projected increase in the primary deficit over the next 30 years is small, its starting size is large. At 3 percent of GDP in 2024, the primary deficit is notably higher than its average over the past 50 years of 1.5 percent. These large primary deficits, along with an already-high level of debt and interest costs, lead to a dramatic snowball effect over time that is illustrated by the light blue and red bars in figure 4. Ongoing large primary deficits generate additional debt that then leads to mounting interest costs, which in turn lead to a considerable additional increase in the total deficit and debt. Under the assumption that government borrowing rates remain at levels that are somewhat higher than the levels of the late 2010s but not especially high by historical standards (an issue discussed more fully below), CBO estimates that higher interest costs will push up the overall deficit by a further 4 percentage points (second light blue bar), for a projected increase in the total deficit of roughly 4.3 percentage points of GDP (red bar) over the next 30 years. Absent policy changes, this dynamic will push the deficit and debt ever higher, including in the years beyond CBO’s window.

Economic developments and policy changes over the past two decades have significantly shifted current and projected levels of federal debt.

The United States has seen two significant adverse shocks to economic activity in the 21st century—the deep and prolonged Great Recession that began in 2007 as a result of the global financial crisis, and the sharp economic downturn that followed the onset of the COVID-19 pandemic in early 2020. Deficits tend to balloon during deep recessions and weak recoveries because lower economic activity reduces taxable income and because fiscal policy aimed at mitigating recession harms and stimulating demand raises government spending and further reduces tax revenues. These recent episodes fit this pattern

Figure 5 shows different vintages of CBO’s federal-debt projections to offer additional perspective on how those downturns (as well as other factors) affected federal debt. Looking at just the actual realizations of debt to date, shown by the solid portion of the red line, one can see the surges in debt that occurred during the Great Recession period and during the COVID-19 pandemic. The other lines in figure 5 show CBO’s projections just prior to these episodes. The level of federal debt and its projected trajectory remained higher after each episode, even though, in both cases, the deficit (not shown) shrank considerably as the economy normalized.

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The large upward shift in the path of federal debt between 2007 and 2020 (corresponding to the gap between the light-blue and dark-blue lines of figure 5) warrants further attention, as it arose only partly from the effects of the Great Recession. To better understand this change, consider how noninterest spending and revenues have evolved, again using different vintages of CBO projections, shown in panels A and B of figure 6.

In which case to read further on the topic of federal debt, the reader can pick up the balance of this report on page 24, Part I: “Addressing US Fiscal Challenges.”

Dynan, Karen. November 8, 2023. “High and Rising US Federal Debt: Causes and Implications” In Building a More Resilient US Economy, edited by Melissa S. Kearney, Justin Schardin, and Luke Pardue. Washington, DC: Aspen Institute.

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