While Congress and the presidential campaigns continue with business as usual — pledging more government giveaways and deep tax cuts — the government’s own accountants have once again revealed that the era of free lunch economics is over.
The Congressional Budget Office (CBO) released new budget estimates showing that this year’s budget deficit will come in just under $2 trillion — nearly double the level from just two years ago, adjusted for the canceled student loan bailout.
As a share of the economy, this year’s deficit will nearly match last year’s record for the largest deficit in American history outside of wars and recessions.
Running $2 trillion budget deficits in a growing economy is virtually unheard of.
And it’s going to get worse. Congressional rules require that CBO’s projections assume all 2017 tax cuts expire on schedule, and that Congress will drastically cut discretionary spending (yeah, right!).
The more realistic budget projections assume a continuation of current policies and show budget deficits surging to a staggering $3.8 trillion a decade from now.
The debt held by the public would reach $50 trillion by 2034, double what it is today. That’s a record 136% of the economy, dwarfing even World War II debt levels.
Tax revenues are not the main problem. Compared to typical levels, they are projected to be just 0.2% of GDP lower this year, and 0.6% of GDP below average a decade from now if the 2017 tax cuts are extended.
Federal spending, on the other hand, is already 3.5% of GDP above its typical level, and expected to jump further to 5.6% of GDP above its average within a decade under current policies.
The combination of below-average tax revenues of 0.6% of GDP and above-average spending of 5.6% of GDP mean that, compared to typical levels, 90% of the budget deficit rise over the next decade will be driven by runaway spending growth.
The primary spending and deficit driver is the retirement of 74 million Baby Boomers into Social Security and Medicare.
Despite the common myth that these programs cannot run deficits, they will run a $630 billion shortfall this year that is expected to leap to $1.6 trillion annually a decade from now.
These deepening shortfalls and budget deficits have made interest costs a ticking time bomb.
The combination of rising debt and interest rates has pushed up interest costs from $352 billion in 2021 to $892 billion this year — on their way to nearly $2 trillion annually a decade from now.
By next year, interest will surpass Medicare as the second most expensive federal expenditure after Social Security.
A decade from now, interest costs will consume 27% of all federal taxes — everything you pay to Washington through April 9th. What a waste.
And even those figures are based on CBO’s rosy assumption that interest rates on the federal debt will not exceed 3.5%.
However, one third of the existing federal debt must be refinanced within the next year. If the federal debt continues to roll over into the 4.5% interest rate seen at recent Treasury debt auctions, then the projected annual budget deficit leaps to $4.5 trillion within a decade.
At that point, 37% of all federal tax revenues would go towards interest on the debt — a debt that would approach 150% of GDP and then continue soaring towards 300%.
These are the ingredients of a debt crisis.
Such a dire outlook requires Washington’s attention. Instead, we get pandering and messaging.
President Biden absurdly claims to have reduced budget deficits, even as the projected deficit over the 2021-2031 period has jumped from $14.5 trillion to $21.3 trillion since he took office.
Back then, CBO projected a 2024 deficit of $905 billion. Now it projects $1.915 trillion.
The president’s latest budget proposed $5 trillion in painful tax increases over the decade — nearly all of which would be plowed into new proposals instead of deficit reduction. This would force future deficit reduction initiatives to begin from these higher tax levels.
The president has also pledged to oppose all spending reforms to the Social Security and Medicare shortfalls driving deficits, even as Social Security’s trust fund sits a decade away from insolvency and a mandatory 21% benefit cut.
Nor have Republicans taken deficits seriously, instead offering empty rhetoric about “waste, fraud, and abuse” while proposing substantially more defense spending, more tax cuts, and also opposing significant reforms to keep Social Security and Medicare costs affordable.
Ultimately, these escalating deficits are unsustainable, as the laws of economics and mathematics always eventually win.
If Washington refuses to make the difficult decisions to rein in this galloping red ink, then the bond market will eventually stop financing this debt at plausible interest rates.
The era of free lunch economics is over, even if politicians will be the last ones to learn this.
Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on twitter @Brian_Riedl.
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Brian Riedl
