The CBO’s Optimistic Projection Of The Budget Deficit Is Discouraging

The nonpartisan Congressional Budget Office keeps periodic tabs on the U.S. economy to see how fiscal reality is changing and how to make decisions now to improve the future. That assumes good intentions, transparent action, and a willingness to make tough decisions.

The “too long; didn’t read” summary is that even under the most optimistic choices, as the Peter G. Peterson Foundation — or PGPF, a nonprofit focusing on the “key fiscal challenges threatening America’s future” — puts it, the national debt increasingly grows.

The CBO’s Scenario Models

The CBO looked at current federal finances and then looked at its baseline deficit projection and four additional scenarios. The current debt is $36.2 trillion:

• Baseline — The CBO projection of added debt from 2025 to 2034 is about $21.1 trillion. With current debt, that would make $57.3 trillion.
• Baseline with slower productivity growth — This scenario with 0.1 percentage point slower productivity growth each year adds $388 billion to the total debt for $57.7 trillion.
• Baseline with slower labor force growth — This scenario with 0.1 percentage point slower labor force growth each year adds $184 billion to the total debt for a total of $57.5 trillion.
• Baseline with higher interest rates — This scenario with 0.1 percentage point higher interest rates on Treasury bills, notes, and bonds adds $351 billion to the total debt for about $57.7 trillion.
• Baseline with higher inflation and interest rates — This scenario with all wage and price indexes growing 0.1 percentage point faster adds $324 billion to the total debt for about $57.6 trillion.

To show how much things have changed, the apocryphal quote attributed to the late Senator Everett Dirksen was “A billion here, a billion there, and pretty soon you’re talking real money.” (According to the Dirksen Center, the politician when once asked about the quote replied, “Oh, I never said that. A newspaper fella misquoted me once, and I thought it sounded so good that I never bothered to deny it.”)

None of these scenarios might happen. Then again, multiple of them could coincide in theory, or other unforeseen factors could also change the predictions.

How Trump’s Plans Could Make Things Worse

The most likely source of changes that could affect the outcome and potentially increase these debt projections is President Donald Trump’s administration.

The Tax Foundation pulled together Trump’s tax plans (there’s a long list; check the link) and estimated that the proposals would increase the 10-year budget deficit by nearly $7.8 trillion. By Senate rules and a lack of 60 votes in that chamber, any budget deal would need offsets to reduce the increased costs. This is due to the requirements of the Senate reconciliation process that allows a simple majority to pass a budget so long as it doesn’t add to the deficit over the next 10 years.

Trump has said a repeal of the green energy credits from the 2023 Inflation Reduction Act would save $921 billion over 10 years. Then he counts on his tariff plans to raise what the Tax Foundation estimates would raise $3.8 trillion.

However, the PGPF argues that because of related interest costs, the tax cuts would increase deficits by $9.1 trillion, and the proposed tax cuts would run $3.3 trillion more than the $4.5 trillion the House budget resolution has allocated.

An Accounting Trick To Cover Problems

“As CBO reported last week, extending the expiring provisions of the 2017 Tax Cuts and Jobs Act without offsets would double the deficit and send debt soaring to 214% of GDP,” PGPF CEO Michael Peterson said in prepared comments sent to me. “And if interest costs are one percentage point higher than expected, debt would balloon to 250% of GDP, showing just how sensitive our fiscal health is to the unpredictable interest rate landscape.”

What makes any of this at all possible is the budget reconciliation process and reportedly as part of that, according to PGPF, lawmakers might be planning to assume real 3% GDP growth, which is “a fiscally irresponsible budget gimmick” for three reasons.

The first is that the projection is far beyond what other resources have suggested. The Federal Reserve in its March economic projection looks for a long-term 1.8% GDP real growth. “In fact, even the most bullish analysts only project an average annual GDP growth of 2.2 percent over that period, topping out at 2.3 percent in 2027,” PGPF wrote.

Second, real GDP growth of 3% is extremely unusual. The country has seen greater-than-3% real growth only four times during the past 25 years.

Third, unlikely growth assumptions then produce “overly rosy [tax] revenue projection,” making deficits seem $2 trillion lower than the CBO’s baseline projections.