This afternoon I briefed the press on the new Congressional Budget Office report, The budget and the economic outlook: 2022 to 2032. I made the following remarks.
Thank you for joining me to talk about the federal budget and the economy. In the latest CBO projections, released today, the federal budget deficit in 2022 is $1.0 trillion. This shortfall would represent a substantial reduction in the deficits of the past two years as federal spending in response to the coronavirus pandemic declines and the current economic expansion continues.
In our projections, which reflect the assumption that current laws governing federal taxes and spending remain broadly unchanged, federal deficits nonetheless remain large by historical standards and generally increase over the next decade. From 2023 to 2032, the annual shortfall averages $1.6 trillion. The projected deficit of over $2 trillion in 2032 would be equivalent to 6.1% of gross domestic product (GDP), well above the average of the past 50 years.
Spending averages 23% of GDP over the next 10 years. Rising interest rates and accumulating debt cause net interest costs to double as a percentage of GDP by 2032. At that time, the aging population and rising cost of care health contribute to the increase in compulsory expenditure.
In 2022, incomes in the CBO’s projections reach their highest level as a percentage of GDP in more than two decades. They then decline over the next few years, but remain above their long-term average until 2032. But spending grows faster than income over this period, so deficits rise.
Federal debt held by the public initially drops to 96% of GDP in 2023 and increases thereafter. In our projections, it reaches 110% of GDP in 2032 (higher than it has ever been) and 185% of GDP in 2052. We aim for our projections to be in the middle of the range of likely outcomes; Yet they are subject to considerable uncertainty, in part due to the ongoing pandemic and other global events.
The CBO’s estimate of the deficit for 2022 is now $118 billion lower than last July. In this current estimate for 2022, revenues are 10% higher than previously forecast and expenses are up 6%.
The projection for the cumulative deficit over the period 2022-2031 is $2.4 trillion higher than it was last summer. Recently enacted laws account for most of this increase. Other changes that increase projected revenues and reduce deficits are mostly offset by economic changes that increase expenses, especially those related to interest and social security.
I will now turn to economics. The pace of inflation since the middle of last year has been the fastest in four decades. In the CBO’s projections, high inflation persists in 2022 due to a combination of strong demand and tight supply in goods, services and labor markets. In response, the Federal Reserve tightens its monetary policy and interest rates rise rapidly. Real GDP (ie GDP adjusted to remove the effects of inflation) is up 3.1% this year, and the unemployment rate is averaging 3.8%. After 2022, economic growth slows and inflationary pressures subside.
CBO released a lot of information today about its new projections, which were produced through the efforts of more than 150 people. I am happy to answer questions.
Phillip L. Swagel is the director of CBO.