CBO’s Long-Term Budget Forecast: Details and Analysis


    As Washington settles into its second quarter of negative economic growth, the Congressional Budget Office (CBO) published its own sobering report on long-term government finances. CBO’s Long-Term Budget Outlook report shows deficits increasing over the next three decades as both federal spending and tax revenues are expected to grow above historic levels, with spending growth far outpacing modest tax revenue growth. indeed Congressional Budget Office (CBO) expects federal spending to reach 30 percent of GDP by 2052, which is most associated with European countries.

    Those predictions should give lawmakers pause as they consider creating expensive new programs subsidize the semiconductor industryexpand health care benefits and fund new programs to combat climate change. CBO expects that even with the end of a large part Tax Cuts and Jobs Act (TCJA) in 2026 and significant new revenues generated from real creeping parenthesisthe gap between tax revenues and expenditures will reach more than 10 percent of GDP by 2052.

    Meanwhile, Congress just approved $280 billion in new spending and tax subsidies The Law of Chips and Science nearly nullifies the stated $300 billion in deficit reduction that proponents say will be achieved Inflation Reduction Act. And this does not take into account the damage that increasing taxes will do for a recessionary economy. As a result, the combination of both pieces of legislation will further worsen the long-term fiscal picture.

    Observation #1: The gap between spending and taxes is widening, even as both are expected to grow above historical averages. The problem is the costs.

    As the chart below shows, over the past roughly 50 years, from 1972 to 2021, the gap between federal spending and tax revenue averaged 3.5 percent of GDP. Expenditures averaged 20.8 percent of GDP, while revenues accounted for 17.3 percent. The gap currently stands at 3.9 percent of GDP, with spending well above historical averages of 23.5 percent of GDP and revenues at a near-record 19.6 percent of GDP.

    While CBO projects at best modest growth in tax revenues over the next three decades, it projects almost linear growth in spending to reach 30 percent of GDP by 2052. The three biggest drivers are net interest payments on the national debt, major health care programs , such as Medicare and Social Security.

    Now interest payments on the national debt amount to 1.6 percent of GDP. But CBO projects that those payments will more than triple to 7.2 percent of GDP by 2052. So debt interest payments will eventually account for a larger share of GDP than either Medicare or Social Security. CBO’s estimate may be conservative if long-term interest rates are higher than currently projected.

    Federal health care programs are a major driver of future deficit spending. Today, this spending is 5.8 percent of GDP (more than Social Security), but it is projected to reach 8.8 percent by 2052. Social Security, now 4.9 percent of GDP, is expected to grow to 6.4 percent over the next 30 years.

    By contrast, discretionary spending — from national defense to transportation to education funding — is expected to account for 6.0 percent of GDP. Thus, by 2052, the primary functions of the federal government will be to provide health care and pension benefits to Americans, and to pay off past debts, rather than core functions such as national security.

    Observation #2: Real creep and the expiration of the TCJA will result in a modest increase in revenue as a percentage of GDP, but nowhere near enough to keep pace with rampant spending.

    One of the biggest surprises, given the current state of the economy, is that federal tax revenues are at near-record levels 19.6 percent of GDP. The only other year in which earnings accounted for most of the nation’s income was 2000, the year of the technology bubble in financial markets. Despite today’s surge in tax collections, CBO expects tax revenues to fall to their historical average in 2025 (17.6 percent) — just ahead of major components Tax Cuts and Jobs Act (TCJA) there is scheduled to end— then gradually grows again, reaching 19.1 percent of GDP by 2052.

    Revenue generated by the expiration of the TCJA—which primarily affects individual plan components—is an important factor in maintaining future revenue levels above historical norms. Indeed, CBO estimates that the expiration of the TCJA would mean an increase in taxes of about 0.8 percent of GDP by 2052.

    Interestingly, the more significant driver of future tax revenue increases, according to CBO, is real creeping parenthesis. While a significant part of the Tax Code, including tax categorys are indexed to the level of price inflation, history shows that wages rise faster than prices. So while the CBO projects that real wages per worker will grow by about 1 percent a year over the next 30 years, that’s enough to boost tax revenue in the economy. The effect is gradual, starting at 0.3 percent of GDP but reaching 1.6 percent by 2052.

    Real bracket creep and TCJA expiration won't keep pace with federal spending CBO Long-Term Budget Outlook Federal Deficit

    The table below shows how a real change in income can increase the amount of income taxed at higher rates while reducing the amount taxed at lower rates. For example, CBO estimates that in 2032, about 9 percent of taxable income will be subject to the top tax marginal tax 39.6 percent (the highest rate since the TCJA expired). However, because of the actual bracket creep, they estimate that 11 percent of income will be taxed at the highest rate in 20 years.

    Likewise, a significant number of low- and middle-income taxpayers will pay higher taxes due to real tax creep. We see that the share of income taxed in the zero bracket and the share taxed in the 10-15 percent brackets decline between 2032 and 2052, while the share taxed in the 20-35 percent brackets categories, increases. It shows how rising real wages can lift taxpayers into higher brackets while quietly increasing the federal coffers.

    Shares of income taxed at different rates Individual income tax system
    Income tax rate
    0 From 10 to 15 percent From 20 to 35 percent 39.6 percent
    2032 year 26% 37% 29% 9%
    2052 year 23% 33% 33% 11%

    Source: US Congressional Budget Office, “2022 Long-Range Budget Projection,” Figure 2-8.

    Observation #3: Congress appears to be making the deficit picture worse with the Chips and Science Act and the Inflation Reduction Act.

    Meanwhile, Congress just passed The Law of Chips and Science which authorizes about $280 billion in new direct subsidies and tax credits for the semiconductor industry and related programs. About $79 billion of that is earmarked for subsidies and tax breaks between 2023 and 2027. The remaining $200 billion is earmarked primarily for research purposes between 2022 and 2031.

    While touted as strengthening domestic production of computer chips and enhancing national security, the bill creates a new “chip” bureaucracy and new special interests that depend on taxpayer subsidies.

    Although the bill’s $79 billion in subsidies and tax breaks are authorized through 2027, Congress is poised to extend popular measures that could likely double the cost of those initiatives over 10 years.

    Next, the Senate is poised to debate the Inflation Reduction Act, which contains about $433 billion in new spending over the next decade: $369 billion for “energy security and climate change” and $64 billion to extend Affordable Care Act (ACA) subsidies for three years .

    These new spending measures are said to be offset by $739 billion in new revenue: $313 billion from a new 15 percent corporate minimum tax book income; $288 billion allowing Medicare to negotiate prescription drug prices; $124 billion, giving the IRS more money to audit high-income taxpayers; and $14 billion by closing the so-called carried interest loophole.

    However, these are static estimates that have not been adjusted for their potential impact on slowing economic growth, which likely outweighs how much the bill would raise in new revenue.

    Still, if the new revenue materializes, the bill is said to be designed to reduce the deficit by $300 billion over the next decade. But almost all of that deficit reduction will be offset by the $280 billion just authorized for the Chips and Science Act. The net impact on future deficits will be negligible at best. However, assuming the ACA subsidies are also extended for a full 10 years, the combined legislation will certainly worsen the long-term financial picture.


    CBO’s latest long-term budget outlook paints a disturbing picture of fiscal irresponsibility. Even assuming that tax revenues remain above historical levels for the next three decades, future deficits are projected to grow rapidly due to unfettered growth in health care, welfare programs, and payments on the rising national debt. Instead of stopping this rampant spending, Congress actively adding programs which will exacerbate these long-term trends. We need a serious dose of fiscal sobriety, not new spending sprees.

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