New CBO Analysis: Biden’s Economic Disaster Exacerbates Budget Outlook

May 26, 2022

By James Carter and Michael Faulkender

On Wednesday, the Congressional Budget Office (CBO) published its latest Budget and Economic Outlook. The economic projections appear somewhat optimistic, given recent economic data, but even with those unrealistic projections, CBO forecasts: 

  • Federal spending will be $69.2 trillion during the 10 fiscal years of 2022 through 2031. This represents an increase in spending of $8 trillion (13.1%) compared to the February 2021 forecast for the same time period. 
  • The biggest increases in spending will come from debt service—interest on the national debt—and programs that support senior citizens—Social Security and Medicare.  
  • Starting in 2029, CBO projects that the federal government will spend more money on debt service ($925 billion) than on national defense ($924 billion). 
  • Over the 10-year budget window, federal spending is projected to be 24% of the size of the economy, compared to its historical average of 20%. Revenues are projected to be 18% instead of its historic average of 17%. The consequence is massive budget deficits. 
  • Debt held by the public is forecast to rise from $22.3 trillion in September 2021 to $40.2 trillion in September 2032.  
  • CBO projects an unreasonably high 3.1% growth for Gross Domestic Product (GDP) this year, despite the negative growth number reported for the first quarter and growing concerns that a recession is on the horizon. 
  • Over the course of the decade (2022 to 2031), CBO has reduced its forecasted cumulative GDP estimate by more than $1 trillion, meaning that the American economy is projected to produce $1 trillion less in goods and services over the next decade compared to the forecast at the beginning of the Biden Administration. 

Budget Details 

When President Biden took office, the CBO estimated that the federal government would spend $61.2 trillion during the 10 fiscal years from 2022 through 2031. Today’s updated forecast from CBO raises that estimate by $8 trillion—or 13.1%—to $69.2 trillion over that same ten-year time frame. CBO attributes $3.4 trillion of the increase to legislation President Biden pushed for and signed into law. The reminder is due to economic factors such as the significantly larger inflation that the American people have endured recently and higher interest rates that will greatly increase the interest payments on the national debt.   

According to CBO’s projections, “net interest outlays increase from $352 billion in 2021 to $399 billion, or 1.6 percent of GDP, in 2022. Those outlays then triple by 2032, reaching $1.2 trillion, or 3.3 percent of GDP.” Starting in 2029, CBO forecasts spending more on debt service ($925 billion) than on defense ($924 billion). Net interest costs are expected to grow 12% annually compared to nominal economic growth of 4% per year—more below on the role of interest rate forecasts for these projections. 

As a percentage of our gross domestic product (GDP), federal outlays are poised to increase from an already elevated 23.8% this year to 24.3% by 2032—a level reached in the past only during times of national crisis. Over the period 1980 to 2019 (prior to the pandemic), federal spending averaged 20.3% of GDP

Revenue projections have likewise increased, but not nearly as much. When President Biden took office, CBO estimated the federal government would collect $49 trillion in revenue during the fiscal years from 2022 through 2031. Today, CBO estimates the government will collect $54.7 trillion—an increase of $5.7 trillion or 11.6%. This increase is largely due to inflation. As a percentage of GDP, revenues are expected to average 18.3% of GDP. Over the period 1980 to 2019 (prior to the pandemic), federal receipts averaged 17.1% of GDP. Given that receipts as a percentage of GDP over the next 10 years are projected to be higher than what they were in the forty years prior to the pandemic, our deficits are not the result of the Tax Cuts and Jobs Act (TCJA). 

Somewhat surprisingly, the CBO forecast extends the expiration date for the Medicare hospital trust fund from 2027 to 2030. It primarily attributes this extension to higher payroll taxes than were expected, again the result of inflation. The Medicare Trustees have not yet issued their 2022 report (it was due April 1) but some were expecting that the trust fund exhaustion date might be elongated because of potential reductions in forecasted health care spending, partially arising from the quickness with which Operation Warp Speed generated vaccines. 

Unfortunately, the inevitable result of spending approximately 24% of GDP while only generating receipts of 18% of GDP is massive budget deficits. CBO forecasts a deficit this year of $1.04 trillion and next year a deficit of $984 billion. Every year thereafter, deficits are expected to exceed $1 trillion, reaching $2.25 trillion by 2032. This causes the debt held by the public to explode. As shown in Figure 1.8 of the CBO report, debt held by the public is expected to reach 98% of GDP this year, reach 110% by 2032 and 185% in 2052. This would eclipse the historical high of 106% that was realized in 1946, just after the completion of World War II.  

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As CBO stated in a report it issued last month entitled The Economic Effects of Waiting to Stabilize Federal Debt, “Waiting to put fiscal policy on a sustainable course and allowing federal debt to continue to climb would have several effects on the economy. As federal borrowing increased, the amount of funds available for private investment would decline (a phenomenon known as crowding out), and interest costs would increase. Perpetually rising debt would also increase the likelihood of a fiscal crisis and pose other risks to the U.S. economy.” The longer we wait to address the federal government’s unsustainable debt, the more damage will be done to our economy. This will erode our ability to defend our nation, improve the lives of the American people, and fulfill our obligations to America’s seniors. Quite simply, increased debt burdens will crowd out other important priorities for the American people. 

Economic Projections  

These budget projections rely on forecasts of the performance of the U.S. economy. While the report was issued today, the economic assumptions were likely made months ago, given the time it takes to generate the budget implications and then write the report. Unfortunately, inflation remains near 40-year highs, GDP growth turned negative in the first quarter of 2022, and there are recession warning signs on the horizon. AFPI has written on these issues here, here, and here

CBO projects 3.1% GDP growth between the fourth quarters (Q4) of 2021 and 2022. After the -1.5% annualized growth rate in the first quarter, it will be exceedingly difficult to attain the CBO’s 3.1% projection. To realize 3.1% for the year, we estimate that we would need to average 4.6% annualized economic growth each of the remaining three quarters of this year. Earlier this month, the University of Michigan reported that consumer sentiment for May 2022 is the 12th worst month on record (this survey extends back to 1952). This reading is the worst since 2011 and is on par with what we observed during the financial crisis and the inflation episode of the early 1980s. These readings are not the conditions under which we would normally expect consumers to realize increases in inflation-adjusted spending, certainly not at a level that would generate 4.6% GDP growth.  

The CBO seems to believe the answer is partly business investment, which it forecasts as growing by 6.6% this year. However, with rising interest rates, greater regulation, and constant talk of higher taxes, it is difficult to see this 6.6% materializing. Digging deeper, residential real estate is forecast to grow 3.3% even though we saw a 16.6% decrease in new home sales earlier this week. Another option to generate growth is net exports. However, one must consider that we currently have a strong dollar, which makes exports more expensive to other countries and imports cheaper to Americans. Nevertheless, CBO forecasts that exports will grow 7.4% this year. In short, every component of CBO’s forecast for GDP this year seems inflated. For comparison, the consensus forecast from the May 10 Blue Chip Economic Indicators report is lower at 2.6% 

Even with these exceptionally optimistic projections, CBO’s May 2022 estimate for real GDP in 2022 is $474 billion below its July 2021 estimate for the year. Over the course of the decade (2022 to 2031), CBO has reduced its forecasted cumulative GDP estimate by more than $1 trillion, meaning that the American economy is projected to produce $1 trillion less in goods and services over the next decade compared to the forecast at the beginning of the Biden Administration. 

The CBO also makes an excessively optimistic assumption for inflation, forecasting it to be just 4.7% from Q4 2021 to Q4 2022 after the consumer price index rose by 6.7% from Q4 2020 to Q4 2021. In just the first four months of this year, CPI has risen 3.7%. In order for inflation to be realized at 4.7% for the year as a whole, we would need to experience inflation over the next eight months of this year of just 1%. This outcome seems exceedingly unlikely considering that gas prices are setting new records regularly and food inflation is expected to persist given the shortages arising from Russia’s invasion of Ukraine. The consensus forecast from the May 10 Blue Chip Economic Indicators report has inflation 1% higher than the CBO forecast. 

Finally, CBO’s interest rate forecasts seem somewhat low as well, and this has important implications for estimated debt service costs. They expect the yield on 10-year Treasuries to average 2.4% this year and 2.9% next year. Today, the 10-year yield is at 2.74% and has so far averaged 2.27% this year. To hit 2.4% for the year, the 10-year Treasury would need to decline to an average of 2.48% for the rest of the year. Will 10-year yields decline 25 basis points for the rest of the year? This could occur if the Federal Reserve slowed its pace of announced rate increases. However, a slowing of the Federal Reserve’s interest rate activity is inconsistent with realizing CBO’s forecasted 4.6% real GDP growth during the next three quarters. 

Overall, even with economic assumptions that strain credulity, the CBO’s latest budget and economic outlook is a wake-up call for the fiscal health of the United States. With spending far outpacing revenues, even while revenues are above historic averages, America is poised to see its debt rise dramatically to the point that the country will be spending more to service the debt than it does on national security. This fact puts the country in a precarious position both militarily and economically, and the picture gets worse if interest rates turn higher than expected or if growth comes in lower than expected. 

James Carter is the Director of the Center for American Prosperity at the America First Policy Institute and is a former Associate Director at the White House National Economic Council. Michael Faulkender is the former Assistant Secretary of the Treasury for Economic Policy and a Visiting Fellow at the America First Policy Institute.