The federal debt is projected to almost double to 202% of gross domestic product by 2051, the Congressional Budget Office said Thursday, reflecting rising health care and debt service costs.
The US economy is expected to grow 1.8% per year for the next three decades, up from the 1.6% predicted by the non-partisan agency in September, as the CBO now expects less impact from the coronavirus pandemic. Growth averaged 3.1% a year from 1951 to 2020, said the CBO.
The federal debt is projected at 102% of gross domestic product in 2021. It exceeded that level only twice before in the history of the United States, in 1945 and 1946, after an increase in federal spending as a result of World War II.
The forecasts do not take into account the $ 1.9 trillion in federal spending proposed by President Biden and supported by Democrats, who strictly control the House and the Senate. Democrats say the move is needed to alleviate problems with business closings and job losses caused by the pandemic and restrictions related to economic activity.
Meanwhile, Republican congressmen are opposed to the size of the stimulus package and point to growing budget deficits and debt as a reason to keep spending under control, as they argue that the economy is already poised for stronger growth.
“The risk of a fiscal crisis appears to be low in the short term, despite the higher deficits and debt resulting from the pandemic,” said the CBO. “However, much greater indebtedness over time would increase the risk of a fiscal crisis in the years to come.”
Budget deficits will increase to 13.3% of GDP in 2051, from 5.7% in 2031, driven in large part by rising debt service costs, said the CBO. Net interest expense will triple relative to GDP in the two decades before 2051, and spending on programs like Social Security and Medicare will also increase.
The weak federal revenue is also expected to contribute to an increase in the budget deficit, said the CBO. After falling to 16% per cent in 2021 from 16.3% in 2020, total revenues as a proportion of GDP are expected to reach 17% in 2025.
The projections offered on Thursday are an extension of the CBO forecasts released last month for the next decade, which showed that the federal debt is expected to increase to a record 107% of economic production by 2031, from 100% of GDP in the last fiscal year ended September 30
Although federal budget deficits were high and widened before last year, they grew significantly as a result of the economic turmoil caused by the coronavirus pandemic and the trillions of dollars of economic relief approved during the administration of former President Donald Trump.
Net interest costs as a proportion of GDP will average 1.6% over the next decade, said the CBO, well below the 50-year average. But then, they are projected to increase over the next two decades, reaching 8.6% in 2051.
The CBO warned that its long-term budget forecasts are subject to greater than normal uncertainty because of the pandemic and may be altered by unexpected changes in demographics, health or the economy.
Government officials, including Treasury Secretary Janet Yellen, have argued that projected low debt costs make it more affordable for Congress to take out more loans now to support the recovery of the US economy. They say taking more loans now can spur a faster recovery, which can improve the country’s fiscal health.
Meanwhile, some money managers were concerned that stimulus measures would lead to an increase in inflation and erode the value of bond returns. The yield on the 10-year reference Treasury note, which influences borrowing costs across the economy, has already risen to levels never seen since the pandemic began.
The CBO projected that 10-year Treasury yields will average 1.6% from 2021 to 2025 and 3% from 2026 to 2031, before steadily increasing to 4.9% in 2051.
Write to John McCormick at [email protected]
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