Federal debt would be about one and one half times the size of the economy within 20 years under an alternative fiscal scenario from the Congressional Budget Office that assumes Congress will continue the recent tax cuts and spending increases enacted over the past year.
Debt held by the public, which excludes debt held by government accounts including the Social Security and Medicare trust funds, would top the previous World War II-era record of 106 percent of gross domestic product by fiscal 2029 under the CBO’s “extended alternative fiscal scenario,” released Wednesday.
That forecast would mean record debt levels are hit five years earlier than under the CBO’s baseline estimates, which assume the tax cuts for individuals enacted last December (PL 115-97) expire after 2025, and that discretionary spending declines starting in fiscal 2020 after the two-year budget deal enacted in February (PL 115-123) lapses. The alternative scenario also assumes dozens of expired tax “extenders” are made permanent, while several suspensions and delays of taxes imposed under the 2010 health care law (PL 111-148, PL 111-152) are also continued.
The heavier debt load would restrain economic growth, the agency said, while pushing up interest rates and making it more expensive for the Treasury to borrow in the future.
Deficits over the next decade, already projected to total $12.4 trillion, would rise by a further $2 trillion under the alternative scenario, and possibly as much as $3 trillion if lawmakers decide to hold the growth of tax revenue down by preventing more households from being pushed into higher tax brackets due to inflation.
At 148 percent of GDP, debt held by the public would be 25 percent greater in two decades than under the CBO’s long range extended baseline projection of what would happen if current laws are followed. Debt grows under the forecasts because spending — primarily for Medicare, Social Security and interest payments on the debt — increases faster than revenue.
Measuring debt as a share of GDP shows how much the government will owe to its creditors in the context of the nation’s resources.
Under the 2017 tax law, the individual income tax reductions and some 50 other provisions are scheduled to expire at the end of 2025, resulting in a jump in revenue beginning the next year. House Republicans are planning to push legislation later this year to extend the individual income tax cuts beyond 2026, though the Senate has thus far taken a dim view of the proposals.
The CBO said marginal tax rates on labor and capital income would be lower than under the current law projection, encouraging working, saving and investment and stimulating economic growth if the tax cuts were extended. At the same time, the agency said the large debt load would crowd out private investment and slow economic growth.
On balance, the economic effects “would make output lower and interest rates higher under the scenarios than under the extended baseline,” the report says.
As in the past, CBO warned that rising debt would have serious and negative consequences for the budget and nation, including reducing national saving and income, raising government interest costs and limiting lawmakers’ ability to respond to unforeseen events.