Just prior to the Memorial Day holiday weekend, the Congressional Budget Office released its updated budget and economic projections. But as bad as you think those projections are, the reality is much worse.
The headline CBO numbers make for bracing reading, and illustrate the work our country needs to undertake—sooner rather than later—to get our fiscal house in order. But the details also show how President Biden and the Democratic Congress have helped exacerbate our fiscally precarious position—and how the crisis will get worse before it gets better.
Drowning in Red Ink
The CBO analysis shows the cumulative effects of the federal government spending far too much:
- Except for a shortfall of “only” $984 billion in 2023, federal deficits will exceed $1 trillion throughout the decade, and well into the future.
- Deficits will rise from roughly 4 percent of GDP to more than 6 percent of GDP by the end of the decade—well in excess of any potential economic growth rate, creating an unsustainable fiscal scenario.
- Net interest costs will more than triple, from $352 billion in 2021 to an estimated $1.2 trillion the federal government will spend just on interest in 2032.
- Publicly held debt will rise to 110 percent of GDP by 2032—“higher than it has ever been.”
Lest anyone believe these budgetary woes stem primarily from “the rich” not “paying their fair share” in taxes, CBO also projected that in 2022, revenues will reach their highest share as a percentage of the economy since the dot-com boom of 2000. Moreover, the CBO report assumes that the President Trump tax cuts expire as scheduled at the end of 2025.
In other words, this document assumes record revenue in the short term and a major tax increase in a few years’ time, and still results in massive debt and deficits over the coming decade.
Effects of Biden Policies
Appendix A of the CBO document provides a useful, if rather depressing, analysis of why we ended up in the fiscal soup. In the short term, much of it comes back to the policies pursued by the Biden administration and Democrats in Congress.
A mere ten months ago, in July 2021, CBO estimated the federal government would run deficits of $12.1 trillion over the coming decade. That number sounds bad enough, but the updated forecast now shows $14.5 trillion of red ink. The budget office provides a breakdown of where the changes came from:
- Legislative changes increased deficits by $2.4 trillion, primarily because last year’s infrastructure bill and this past March’s omnibus spending legislation led CBO to assume federal spending in future years will increase at a greater pace than it had expected previously.
- Economic changes increased deficits by a net of $1.1 trillion. This number reflects the net effects of higher inflation—which increases tax revenue, because people’s incomes rise into higher tax brackets (i.e., “bracket creep”), but also requires larger spending on cost-of-living adjustments for programs like Social Security—and the effects of higher interest costs on federal debt.
- Technical changes reduced deficits by a net of $1 trillion, most of which came from increases in federal income tax revenue. CBO currently considers some of these revenue increases “unexplained;” however, it is entirely possible that the asset bubbles created by the Federal Reserve printing money for the last two years led to higher capital gains taxes, as individuals sold assets like stocks, cryptocurrencies, etc., at inflated prices.
Overall, the CBO document demonstrates how the Biden administration bears responsibility for the deterioration in the federal government’s budgetary condition, with higher spending, higher debt, and higher interest costs accelerating the nation’s path towards a fiscal crisis.
Already Worse Than Predicted
As bad as the CBO data are, the budget office’s dismal predictions have already been overtaken by events. Take for instance this passage regarding inflation:
Since CBO completed its economic forecast on March 2, 2022, two additional months’ worth of data about inflation have accrued. Those data indicate that inflation was higher than the agency projected it would be during March and April and that inflation may end up being higher than projected in 2022 as a whole.
Similarly, a few pages later the budget office’s economic estimates as of March 2 assumed that “the interest rate on 10-year Treasury notes rises from 1.5 percent in the fourth quarter of 2021 to 2.7 percent in the fourth quarter of 2022, as the Federal Reserve tightens monetary policy.”
In reality, the yield on the 10-year Treasury reached 2.7 percent not in the fourth quarter of this year, but in mid-April, as the continued rise in inflation led bond traders to assume additional monetary tightening by the Fed. As such, the CBO estimates showing a tripling of net interest costs for the federal government over the coming decade could prove an underestimate.
These forecasting errors, such as they are, don’t much speak to potential inaccuracy by the budget office. Compiling budget estimates requires hundreds of calculations and assumptions, such that CBO’s work takes months to complete. Rather, it illustrates the Biden administration’s poor economic stewardship, such that forecasts on not just inflation (which was affected by Russia’s invasion of Ukraine) but interest rates and debt could deteriorate so substantially from March to May.
Fixing the mess our country faces will require leaders willing to make tough choices regarding spending and budgetary priorities. But given Democrats’ continued efforts to revive some or all of their $5 trillion Build Back Bankrupt proposal, finding such individuals will first require evicting many of our current “leaders” from office.
Source: The Federalist
