CBO projections of record high debt could complicate Biden's agenda

WASHINGTON (SBG) — The federal government’s debt is projected to outpace the size of the economy over the next decade, according to new Congressional Budget Office estimates, as concerns about rising deficits threaten to impede President Joe Biden’s ambitious but costly agenda.

In a report released Thursday, the CBO projected that the federal deficit would reach its second-highest level since 1945 this year, totaling 10.3% of gross domestic product. Based on current policies, deficits would remain above historical averages for the next decade, accounting for 4% to 6% of GDP annually through 2031.

Federal debt held by the public hit 100% of GDP at the end of fiscal year 2020, and the CBO projected that figure would continue to rise, reaching 102% in 2021 and climbing to a record level of 107% of GDP by 2031. The debt has already surpassed $27 trillion and is on track to exceed $35 trillion within a decade.

These figures do not take into account the $1.9 trillion coronavirus relief package Democrats aim to pass in the coming weeks or President Biden’s plans to spend trillions more on investments in economic recovery. It is not yet clear how much of that agenda will make it through a narrowly divided Congress or how much of it could ultimately be offset by tax increases, spending cuts, or other factors.

The federal government has already approved more than $3 trillion in spending to fight the pandemic and bolster the economy, but Democrats maintain much more is needed. Job growth has slowed in recent months, the economy’s future trajectory is uncertain, and millions of Americans still face dire financial circumstances.

With Democrats pushing for more stimulus spending and Republicans urging fiscal caution, both sides are likely to seize upon the CBO’s findings to make their case. The debt outlook is certainly bleak, but it is slightly less bleak than it seemed a few months ago.

The CBO’s estimates released Thursday represented an improvement upon its previous projections, with cumulative deficits through 2031 expected to be 3% smaller than the agency projected last September. Analysts cited predictions of stronger economic activity, higher interest rates, and higher inflation that would boost both revenues and expenditures as the primary reasons for the revision.

The report acknowledged many variables could impact the long-term outlook, including the course of the pandemic in the coming months. The CBO assumed the economy would return to pre-pandemic levels by mid-2021, but delays in vaccination, the spread of more transmissible variants, or extended restrictions on businesses could slow the recovery.

The latest CBO report does not forecast beyond 2031, but the agency’s previous long-term outlook released in September warned debt could nearly double GDP by 2050. That report pointed to rising inflation, slow economic growth, and declining value of Treasury securities as potential consequences.

Republicans say the grim projections should give lawmakers pause as they weigh additional spending just two months after Congress approved a $900 billion relief package in December. In a letter to colleagues Thursday, Sen. Rick Scott, R-Fla., warned of an “existential threat” to American families from inflation driven by out-of-control federal debt.

“There is a direct link between the federal government’s unsustainable spending and the rising cost of goods and services and it’s disastrous for American families – especially hourly workers and low income households. When inflation rises, the price of every day goods goes up,” Scott wrote.

However, Federal Reserve Chairman Jerome Powell said in remarks to the New York Economic Club Wednesday that now is not the time to worry about the nation’s debt outlook. He committed to maintaining low interest rates and supportive monetary policies for the foreseeable future, and he downplayed fears of an overheated economy spurring inflation.

“We’ve seen really the last decade be characterized by global disinflationary forces and large, advanced-economy nations struggling to reach their 2% inflation goal from below,” Powell said. “Inflation dynamics will evolve, but it’s hard to make the case why they would evolve very suddenly.”

Biden administration officials do not deny that piling on trillions more in spending after the federal government pumped unprecedented stimulus into the economy might have negative repercussions, but they argue inaction is a far greater gamble.

“This is risk management. This is balancing risks,” White House economist Jared Bernstein told reporters last week. “And in our view, the risks of doing too little are far greater than the risks of doing too much.”

Treasury Secretary Janet Yellen, who had publicly warned about the nation’s rising debt repeatedly over the last decade, told senators at her confirmation hearing in January that overcoming the pandemic and stabilizing the economy would be a vital step toward fiscal sustainability.

"To avoid doing what we need to do now... would likely leave us in a worse place fiscally with respect to our debt situation," Yellen said.

Some economists echoed that sentiment. According to David Sjoquist, an economics professor at Georgia State University, there are long-term dangers to deficit spending, including concerns that investors will reduce purchases of private securities to buy government debt, but keeping the economy afloat is a more pressing priority than exercising fiscal restraint.

“In normal times, you wouldn’t want the debt to equal GDP, but these are not normal times, so you don’t want to cut back on spending,” Sjoquist said. “It would make no sense to say, ‘Oh, we can’t afford this, we can’t go into further debt, so we’ll just crash the economy.’”

With the nation facing steep economic and public health challenges and inflation projected to remain relatively low, Kindred Winecoff, an expert on the politics of the global economy at Indiana University Bloomington, expects the government taking on more debt would have minimal immediate impact. Allowing Americans to fall deeper into debt because of the economic strain brought on by the pandemic could be far costlier in the long run.

“There’s going to be debt either way... It’s just a choice whether we want that to be located in the private sector or the public sector,” Winecoff said.

Now might not be the time for deficit reduction, but James Capretta, a resident fellow at the American Enterprise Institute, said lawmakers must be cognizant that actions taken now could make it harder to mitigate the problem later. Debt at the levels CBO is projecting would seriously increase the odds of another fiscal crisis if interest rates or inflation spike in the future.

“The truth is, if you spent $100 billion more this year, that’s not the end of the world,” Capretta said. “What is the end of the world is allowing debt to reach 150%, 175%, 200% of GDP.”

The federal government was already on an unsustainable fiscal path before the pandemic struck, with debt nearing $23 trillion by the end of 2019. Democrats say Republicans who supported increased spending and debt-financed tax cuts under President Donald Trump have little standing to complain now.

“This is a pattern we saw in general going back, I think, to the Kennedy administration... The Republicans love austerity when they’re not in power, but they love expansion when they are,” Winecoff said.

Politics aside, $27 trillion is an enormous amount of money for the federal government to owe. It might be low on the list of crises the nation is currently facing, but it is one that will eventually need to be addressed.

“We were right to borrow to combat the pandemic and rescue the economy – if there were a moment for borrowing, this is it,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, in a statement. “But this report is a stark reminder of the long-term fiscal challenges that already existed before we were hit by COVID, and have now grown worse.”

As Republicans sound alarms about soaring deficits, Democrats are on track to pass Biden’s stimulus plan through reconciliation, a legislative maneuver that allows the Senate to approve budget-related measures with a simple majority. However, the rules that govern reconciliation limit the provisions that can be included in the bill, and anything that increases the deficit beyond a 10-year budget window is prohibited.

House Democrats are still crafting the relief package they intend to send to the Senate, so the total price tag is not set in stone. Once they pass it, the Senate parliamentarian could still strip out provisions that violate reconciliation rules, but the final legislation is likely to add a substantial sum to the deficit for at least the next year or two.

“Do I think deficit concerns should be a full impediment against doing one more COVID bill? No... but do we need to throw the kitchen sink in at this point?” Capretta said.

The $1.9 trillion relief proposal is only part of Biden’s plan to help the country “build back better” in the wake of the pandemic. This month, he is expected to detail a recovery package that includes new spending on manufacturing, infrastructure, energy, and other priorities that he predicts will create millions of jobs and spur economic growth.

“If we invest now boldly, smartly and with unwavering focus on American workers and families, we will strengthen our economy, reduce inequity and put our nation’s long-term finances on the most sustainable course,” Biden said in a speech last month. “And where we’re making permanent investments, recurring investments, as I said on the campaign trail, we will pay for them by making sure that everyone pays their fair share.”

The tax reform plan Biden released as a candidate would increase federal revenues by $3.4 trillion to $4 trillion over a decade, mostly by raising taxes on corporations and higher-income households, according to independent estimates. He also proposed $5.4 trillion in new federal spending, an analysis by the Penn Wharton Budget Model found.

In January, Biden indicated his tax increases could help pay for the recovery investments. Passing a $4 trillion tax hike is far from assured, though, and major new expenditures are certain to face resistance from Republicans, and possibly even some Democrats.

Lawrence Summers, a former economic adviser to President Barack Obama, has questioned the priorities of Biden’s stimulus proposal and encouraged Democrats to focus more on economic recovery and growth than immediate stimulus. Spending too much now could make it harder to spend more later, he argued.

According to MacGuineas, low interest rates gave the federal government some flexibility to borrow at minimal cost, but much of that leeway has already been used up by previous stimulus packages. She cautioned against proceeding with additional spending without some consideration of tax increases and discretionary spending cuts to pay for it.

“We understand and share the desire to make vital public investments and address income inequality,” she said. “But we shouldn’t ask our kids to bear the cost of all this when we are already leaving them a record mountain of debt.”

Dealing with that mountain of debt will require a sustained commitment to fiscal responsibility from both parties and a serious effort to reform entitlement programs like Medicare and Social Security. Surviving the pandemic and rebuilding the economy might come first, but the CBO projections make clear the debt debate cannot be put off forever.

“There has to be a massive bipartisan reset,” Capretta said.