The U.S. budget deficit is projected to soar 60 percent, to $2.6 trillion by 2034 as federal spending on interest and health costs is expected to continue trending higher over the next decade, according to the Congressional Budget Office’s (CBO) 2024–2025 outlook.
In the current fiscal year, the federal deficit is expected to be $1.6 trillion. This is down about $100 billion from the previous estimate in May 2023, driven by a reduction in discretionary spending from the Fiscal Responsibility Act achieved during the debt ceiling negotiations between President Joe Biden and former House Speaker Kevin McCarthy (R-Calif.).
The budget shortfall is forecast to rise to $1.8 trillion in 2025. The budget gap will fall back to $1.6 trillion by 2027, the non-partisan budget watchdog forecast in its 10-year outlook. By 2034, the deficit will reach close to $2.6 trillion.
In total, cumulative deficits will exceed $20 trillion by 2034.
As a share of the gross domestic product, the budget deficit will represent 5.6 percent in 2024, 6.1 percent in 2025, and 5.2 percent in 2027 and 2028.
By 2034, the deficit-to-GDP ratio will exceed 6 percent, matching a level only seen during and after the Second World War, the Great Recession, and the coronavirus pandemic.
Federal spending will account for about 23 percent of the economy from 2024 to 2028. It will then surpass 24 percent of GDP by 2034, fueled by growth in outlays for seniors (Medicare and Social Security) and a substantial boost in net interest costs.
Cumulative net interest payments will exceed $12.4 trillion between 2025 and 2034.
Government revenues will represent fewer than 18 percent of the GDP this year and remain around this percentage through 2034.
“Measured in relation to economic output, deficits during that period are about 50 percent larger than their historical average over the past 50 years,” said Phillip Swagel, director of the CBO, in a statement.
“Net interest costs are a major contributor to the deficit, and their growth is equal to about three-quarters of the increase in the deficit from 2024 to 2034. Initially, net interest costs are similar to the amounts of discretionary spending both for defense and for nondefense activities. By the end of the period, they are roughly one and a half times larger than each, at $1.6 trillion.”
A Look at the Economy
Looking at the broader U.S. economy, the CBO thinks economic growth will slow at a pace of 1.5 percent in 2024 as unemployment rises, partly because of tighter monetary policy by the Federal Reserve. Real GDP will then accelerate to 2.2 percent in 2025 and 2026 in response to the central bank cutting interest rates due to weaker economic conditions.The CBO stated that real GDP growth is predicted to hover around the 20-year historical average of 2 percent in the following years.
“CBO projects that a surge in the rate of net immigration that began in 2022 will continue through 2026. That rise in the number of people who enter the United States minus the number who leave is projected to expand the labor force and increase economic growth,” the report stated.
The Federal Reserve’s preferred inflation gauge—the Personal Consumption Expenditures (PCE) price index—will continue heading toward the long-run target rate of 2 percent this year “and then ticks up in 2025, before declining slightly.”
As for the Consumer Price Index (CPI), it is projected to be at an average rate of 2.5 percent in 2024 and 2025, and then drop toward 2.2 percent. The CBO believes the CPI will remain slightly above a 2 percent average until 2034.
Interest rates will initiate their downward trajectory in the second quarter of 2024 and slide toward an annual average of 2.9 percent over the next decade. This is higher than the CBO’s initial estimates.
As a result of a lower benchmark policy rate, the average 10-year Treasury note yield is expected to dip to 4.6 percent in 2024 and 2025 and drop below 4 percent from 2026 to 2028. However, between 2029 and 2034, the benchmark 10-year yield will return above 4 percent.
‘Out of Control’
U.S. debt is “rising out of control,” and it is time for Congress to resolve the fiscal challenges, says Maya MacGuineas, president of the Committee for a Responsible Federal Budget (CRFB).“The outlook has improved some thanks to the bipartisan Fiscal Responsibility Act, but our fiscal situation remains precarious. The national debt will reach a new record as a share of the economy in four years, and interest costs will hit a record in just two years,” Ms. MacGuineas said in a statement.
With interest on the national debt exceeding defense spending next year, “this is no way to run a country,” she added.
Economists note that the CBO outlook is put together without recession risks, so the budget deficit and federal outlays could be much higher should the country face an economic downturn.
“Reality is a recession would result in much more dramatic deficits than the now new normal of $2 trillion+ deficits,” said Sven Henrich, a financial market strategist at Northman Trader, on X.
However, Sen. Sheldon Whitehouse (D-R.I.), chairman of the Senate Budget Committee, says the CBO’s projections show that Democrats’ investments are proving to be beneficial for the economy.
“Today’s CBO baseline confirms that Democrats’ investments to jumpstart our recovery and promote a stronger economy worked: CBO is now projecting faster economic growth, lower deficits, and lower unemployment,” Mr. Whitehouse said in a statement.
As of Feb. 5, the national debt stands at $34.153 trillion, up nearly 9 percent from the same time a year ago.
