Debt Ceiling Deal Will Trim National Debt by $1.5 Trillion by 2033: CBO

President Joe Biden shakes hands with House Speaker Kevin McCarthy (R-Calif.) before Biden's State of the Union address at the U.S. Capitol in Washington on Feb. 7, 2023. (Jacquelyn Martin/Pool/Getty Images)

The debt ceiling agreement reached by President Joe Biden and House Speaker Kevin McCarthy (R-Calif.) last month will reduce the national debt and decrease net interest payments over the next decade, the Congressional Budget Office (CBO) said in a new report.

The nonpartisan budget watchdog assessed projections in its May 2023 baseline and the estimated effects of the Fiscal Responsibility Act (FRA), which was signed into law on June 3 by Biden.

After calculating the numbers inside the debt limit agreement, the CBO found that the FRA would reduce the cumulative deficit for the 2024 to 2033 period by about $1.5 trillion to $18.8 trillion, down from the previous expectation of $20.3 trillion.

Most of this decline in federal deficits emanates from the expectation that the FRA’s statutory caps will put a ceiling on discretionary funding in 2024 and 2025.

“Not only will those caps affect spending in 2024 and 2025, but they also affect CBO’s projections of discretionary spending in 2026 and beyond because of the way that the agency is required to project funding in those years,” the CBO wrote. “In CBO’s projections, discretionary funding in a future year generally is based on the amount of funding provided or projected for the previous year, adjusted for inflation. Because the caps reduce projected funding for fiscal year 2025, the projections for the following year (and each year thereafter) are also reduced.”

The debt limit deal will result in a $188 billion decrease in net interest payments by 2033, beginning with a $1 billion drop in fiscal year 2024.

Congressional Budget Office Director Phillip Swagel testifies before the Legislative Branch Subcommittee of the House Appropriations Committee in Washington on Feb. 12, 2020. (Sarah Silbiger/Getty Images)

The national debt is still expected to be above $50 trillion by 2033.

According to the CBO, the May 2023 baseline predicted that the national debt would be $52.387 trillion in 10 years. However, the cumulative effects of the FRA will see the national debt be $1.528 trillion lower, totaling $50.86 trillion.

The FRA will also trim the percentage of gross domestic product by about 3.9 percent to 129.5 percent, below the CBO baseline estimate of 133.3 percent.

Last month, Biden and McCarthy agreed to install caps on most discretionary funding, rescind IRS funding and specific pandemic-related unobligated funds, and modify work requirements for Supplemental Nutrition Assistance Program and Temporary Assistance for Needy Families benefits.

Penn Wharton Budget Model

The University of Pennsylvania’s Penn Wharton Budget Model (PWBM) forecasts that the FRA will cut noninterest spending by $1.3 trillion over the 2024 to 2033 span “using standard scoring assumptions.”

After fiscal year 2025, spending will continue to expand with inflation. But the PWBM notes that the federal spending would begin from a “lower level relative to baseline policy due to spending caps in FY2024 and FY2025.”

Moreover, the PWBM researchers warn that the debt ceiling agreement doesn’t prohibit Congress from returning to pre-FRA spending levels.

“Under this alternative scoring assumption, the 10-year spending reduction comes only from the cost savings in FY2024 and FY2025,” a May 31 report by PWBM reads. “In this case, PWBM estimates a 10-year noninterest spending reduction of $234 billion. Alternatively, if Congress adopts the FRA’s discretionary spending limits through FY2029 despite the lack of enforcement via sequestration, PWBM estimates $1.8 trillion in savings.”

Deteriorating Fiscal Outlook

Economists at the Peter G. Peterson Foundation contend that the nation’s fiscal outlook has deteriorated over the past year, citing the CBO’s May 2023 baseline model that revealed rising deficits.

“While the recent deterioration of the nation’s fiscal situation is mostly due to legislative and economic factors, the underlying concern about the fiscal trajectory stems from a structural mismatch between spending and revenues,” a June 7 report by the foundation reads. “However, it’s not too late for lawmakers to correct course.”

Last month, the Government Accountability Office (GAO) published a report titled “The Nation’s Unsustainable Fiscal Path.” It projected that the debt-to-GDP ratio would exceed 200 percent by 2051.

Lawmakers have attributed the dour outlook to the coronavirus pandemic, but GAO officials argue that “the underlying conditions driving this unsustainable fiscal outlook existed well before the pandemic.”

“Every fiscal year since 2002, the federal government has run a deficit—meaning spending exceeds its revenues—and added to its debt,” the GAO stated. “Going forward, spending, including for Social Security, Medicare/Medicaid, and net interest on the debt, is projected to continue to outpace revenue by increasing amounts.”

Laurence Kotlikoff, a Boston University economics professor and bestselling author, opines that kicking the can down the road, which he asserts the FRA does, “is our fiscal pastime.”

“Make no mistake, our nation’s ever growing fiscal gap will destroy our country’s economic future no less than fiscal profligacy has destroyed the economic futures of Argentina, Venezuela, Zimbabwe, and so many other economic basket cases,” he wrote.

The U.S. Treasury will release the May budget statement on June 12. It’s projected to show a $201 billion deficit for the month. The federal government has recorded a budget shortfall in seven of the first eight months of the current fiscal year.