(Bloomberg) — The US government is on track to surpass record debt levels set after World War II in just four years, the Congressional Budget Office warned on Friday — even as it lowered somewhat its deficit projections for the next decade.
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The new CBO estimates don’t include revenue losses from President-elect Donald Trump’s plans to extend expiring provisions of his 2017 tax cuts and further steps to reduce levies. The nonpartisan agency’s policy is to follow current law in making its forecasts, so it projects a boost in tax revenues from the expiration of tax reductions that’s looming at the end of this year. Most private analysts see an extension as likely.
For this year, the projection for the budget deficit dropped to $1.87 trillion, from $1.94 trillion in the CBO’s last outlook in June. That amounts to 6.2% of US gross domestic product.
The improved forecast was largely driven by stronger economic growth in 2024 than had been anticipated by the CBO and most private economists. The impact of that larger GDP base ripples through deficit forecasts for the rest of the decade, with higher projections for individual and corporate income and tax collections.
Despite the adjustment, the forecasts are a portrait of escalating deficits and debt that’s sure to provide fodder both to fiscal conservatives demanding spending cuts and to Democrats opposing Republican plans for sweeping tax cuts.
“It doesn’t change the policy picture,” CBO Director Phillip Swagel said during a press conference following the release Friday. “The fiscal situation is daunting, the debt trajectory is unsustainable. It’s just the economy is a bit bigger than we thought it was last June, and therefore there’s more revenue.”
Total US government debt held by the public is projected to reach 107% of GDP by 2029, exceeding the 106% record set in 1946, just after the end of World War II.
By 2035, total debt is forecast at $52.1 trillion, which would be 118.5% of GDP. At the end of the 2024 fiscal year — the end of September — it stood at $28.2 trillion, or 98% of GDP.
Extending the expiring provisions in Trump’s 2017 tax law would increase deficits by $4.6 trillion over 10 years, according to a CBO estimate from last May. The estimate didn’t include additional tax cuts Trump has promised.
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The rising debt burden is largely driven by Social Security and Medicare costs, related to the retirement of the Baby Boom generation, along with growing interest payments to service the debt, the CBO said.
Both Democratic and Republican lawmakers have opposed lowering Social Security benefits despite the cost of paying them out to an expanding elderly population. Many economists argue it would be difficult, if not impossible, to balance the budget without reducing the program’s retirement benefits or increasing taxes.
Higher yields on Treasury securities mean the US is paying an increasing amount to service its debt. These payments are expected to reach 3.2% of GDP in 2025. The CBO estimates net interest payments keep climbing to 6.1% of GDP by 2035.
The CBO expects US economic growth to moderate in 2025 to 1.9%. The agency forecast unemployment will rise to an average of 4.3% this year. It stood at 4.1% last month.
(Updates with Swagel comments, chart, additional context beginning in sixth paragraph.)
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