CBO Report Shows Government Spending Is Creating a Fiscal Crisis

The Congressional Budget Office (CBO), which is the agency responsible for federal budgetary and legislative analysis, released its annual Budget and Economic Outlook. Normally, this would be a normal update to a seemingly uninteresting report. What made the report intriguing is not simply updating for such economic realities as high inflation and tighter monetary policy. This report accounted for the fact that we are at the end of an unprecedentedly high amount of so-called "emergency" pandemic spending, i.e., expansionary fiscal policy. Given how critical I have been of the Federal Reserve and Congress, particularly when it came to contributing to inflation, I am not surprised that the fiscal state is not going well. However, I did not expect things to get this atrocious this quickly. The big picture is that federal debt is projected to climb to 195 percent of GDP by 2053. 

What is the reason for this major increase? Those who were critical of Trump thought it would be because of the tax reform in the Tax Cuts and Jobs Act. There was a slight dip in corporate taxes in 2018, but there was otherwise an increase in tax revenue (p. 3).

According to the CBO, it is "mainly because of increasing interest costs and the growth of spending on major health care programs and Social Security (p. 2)." Social Security and major federal health care programs account for about 60 percent of the projected growth between 2023 and 2033.

The CBO recognizes that government spending since spring 2022 exacerbated inflation (p. 39). The sad truth is that it was not simply unprecedented stimulus spending during the pandemic that made our economic situation worse. GDP growth is expected to stagnate, averaging 2.4 percent from 2024 to 2027 and 1.8 percent from 2028 to 2033 (p. 3). Unemployment and labor force participation rate do not look better (p. 44).

This does not bode well for the United States. Much of economic literature finds that by the debt-to-GDP ratio reaches 78 percent, a country starts to run into issues. We are clearly past that point. By 2028, it will reach 106 percent, which is higher than the previous record for debt-to-GDP ratio that was set during World War II. As I explained in December 2020, a high debt-to-GDP ratio matters for many reasons, including slower economic growth, more tax dollars paying interest payments, and lower investment. 

As we can see above, tax increases alone cannot cover the ballooning spending. Federal spending is out of control and will only get worse as interest rates get higher. Trying to balance a $20 trillion budgetary shortfall suddenly is going to be too much for politicians to stomach. The debt limit should be a leverage point. If we want the United States to avoid financial ruin, Congress needs a credible fiscal stabilization plan. Only with true fiscal reform that entails discipline in government spending can the United States avoid going off a fiscal cliff.