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Federal debt will balloon over next decade under current policies, report says

President Joe Biden arrives to deliver his State of the Union address to a joint session of Congress at the Capitol, Tuesday, Feb. 7, 2023, in Washington. (AP Photo/Carolyn Kaster)
President Joe Biden arrives to deliver his State of the Union address to a joint session of Congress at the Capitol, Tuesday, Feb. 7, 2023, in Washington. (AP Photo/Carolyn Kaster)
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A new report from the Congressional Budget Office projects short-term economic pain and long-term budget problems for the United States.

The CBO's forecast has federal debt ballooning to $46 trillion over the next decade, nearly double what it is now.

And the deficit is projected to increase from $1.4 trillion this year to $2.7 trillion by 2033.

“Long-term, it's a problem. It's a big problem. It's not sustainable,” Moody’s Analytics Chief Economist Mark Zandi said.

“If you look at 10, 20, 30 years from now, if we don't make a policy change to address that forecast and rein in those budget deficits and get our debt load down, I do think we will struggle with much higher interest rates, which will weigh on our ability to grow productivity and our standard of living,” he said. “So, I do think it's critical that lawmakers do address these long-term fiscal issues.”

The CBO says its projections look at what the federal budget and the economy would look like under current policy.

Our fate is not set in stone, but experts say it will take political will to change course.

"Democrats have to compromise on the social spending, and Republicans are going to have to compromise on the taxes," said Todd Belt, Political Management program director at The George Washington University.

The CBO projects federal debt to rise from 98% of the gross domestic product this year to 118% in 2033. And it sees the debt continuing to rise, largely fueled by increasing interest and increased spending on Social Security and Medicare.

If debt reaches 118% of GDP, it will be about two and a half times of its average over the past 50 years.

Spending on Social Security is expected to jump 10% this year with an 8.7% cost-of-living adjustment for beneficiaries kicking in. That’s the largest Social Security cost-of-living adjustment since 1981.

And Social Security spending is on track to nearly double to around $2.3 trillion in the next 10 years.

But Social Security and Medicare are among the items lawmakers don’t want to even consider cutting.

“Social Security still remains the third rail of American politics,” Belt said. “And that means you touch it, you die.”

The lawmakers know how important those programs are to the people who vote them into office.

And the Social Security equation is becoming more complicated as baby boomers age out of the workforce and begin drawing on their benefits.

The CBO says the number of beneficiaries of Social Security and Medicare will grow faster than the overall population.

Maya MacGuineas, the president of the bipartisan Committee for a Responsible Federal Budget, said high debt “has so many damaging effects.”

It weakens our economy and our budget, with more spending just to cover the interest, she said.

It leaves the country vulnerable to the next economic crisis and leaves the U.S. dependent on foreign countries who lend us money, she said.

The federal government had to borrow trillions of dollars during economic emergencies, like recessions and the pandemic. MacGuineas said that’s when we’re supposed to borrow.

“But the problem was that when we weren’t in those emergencies, we also borrowed,” she said. “Ideally, that is a time when you’d be running at least small budget surpluses. But we continued to borrow as we were under President Trump before COVID and as we have been under President Biden since COVID, and that’s true for both tax cuts, many of which are Republican-only tax cuts, but many of which are bipartisan tax cuts.”

The last time we had a budget surplus was under President Bill Clinton and the Republican-controlled Congress of the late 1990s.

If we want to have a surplus again, or even a smaller deficit, it will likely take compromise from the White House and congressional Republicans on a combination of spending cuts and tax increases, both Zandi and Belt said.

Belt said raising the corporate tax has always been easier than raising the income tax.

“The voters feel it, and corporations don't vote,” he said. “They lobby, but they don't vote.”

Nondefense discretionary spending is most likely to be the target of potential budget cuts, Belt said. Those are primarily social programs.

Belt said the current budget negotiations are mainly between Biden and Speaker of the House Kevin McCarthy. And this new CBO report might soften Biden’s position that he won’t negotiate to lift the debt ceiling, Belt said.

The government has hit its statutory debt limit and faces the danger of defaulting on its debt obligations by this summer.

Zandi doesn’t think the White House and Congress will let that happen.

But he’s less optimistic that Washington will find long-term budget fixes.

“We can't generate the political will to raise taxes or cut spending,” Zandi said.

Perhaps the budget problems are resonating more with voters, though.

The Pew Research Center says 57% of Americans cited reducing the budget deficit as a top priority for the president and Congress to address this year, up from 45% a year ago.

Zandi said the least lawmakers could do now is make sure any new legislation is deficit neutral.

American families might also be facing harder budget decisions this year, with stubbornly high inflation still sitting at 6.4%.

The CBO also offered an economic outlook for the next 10 years.

The outlook calls for inflation to continue to exceed the Federal Reserve’s long-run goal of 2% through the next couple years before nearing the target rate by 2026.

That would have the federal funds rate, the rate at which banks lend to each other, rising to 5% in the first half of this year before falling to 3% by the end of 2024.

Zandi said those projections from the CBO come close to his own projections, even if he has small differences in the timing of things.

The outlook also calls for real GDP to stall out this year before rebounding as inflation comes down in 2024 and beyond.

“Yeah, I think it's going to be a tough year for growth,” Zandi said. “Very little GDP growth. Job growth will slow sharply. I don't think we'll see any meaningful job loss, but I don't think we're going to get a lot of jobs. Certainly, by the second half, late this year, I think the job market is going to essentially go flat."

One area of the economic outlook where the CBO and Zandi have a meaningful split of opinion is in the unemployment rate.

The CBO is projecting unemployment to rise to 5.1% by the end of the year.

The unemployment rate, now at a 53-year low of 3.4%, is projected by the CBO to hover between 4.5% and 4.9% over the next decade.

“They're more pessimistic than I am,” said Zandi, who added that he’s not expecting a recession. “I think the unemployment rate, which is 3.4% today, will be north of 4% by this time next year. But I don't think we're going to get as high as 5 (percent).”

One thing that has a serious impact both on the economy and the federal budget is the labor force.

The CBO made note in its report of the ongoing, long-term slowdown in the growth of the labor force.

Zandi said the labor force slowdown, again driven by aging baby boomers, is projected to continue over the next couple of decades.

“Businesses’ No. 1 problem is going to be finding workers and retaining them, and it's going to be a real constraint on our ability to grow more quickly,” Zandi said.

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