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CBO says long-term debt lower than forecast last year

30-year estimates drop because of spending caps in debt limit law

Speaker Kevin McCarthy, R-Calif., conducts a news conference on May 31 after the House passed a bill to raise the debt limit and cap future spending.
Speaker Kevin McCarthy, R-Calif., conducts a news conference on May 31 after the House passed a bill to raise the debt limit and cap future spending. (Tom Williams/CQ Roll Call)

This month’s law suspending the debt ceiling and capping appropriations has lowered projected spending, deficits and debt over the long haul, the Congressional Budget Office said in its latest long-term budget outlook.

Compared to the agency’s report issued last year, overall spending and deficits are higher over the next several years in the updated forecast released Wednesday. But in part because of the spending caps in the debt limit law, estimated spending in the latter part of the 30-year projection period will be lower than the agency estimated last summer.

The latest projections are different as well from a more recent long-term estimate CBO published in February based on more limited data.

“The differences reflect reductions in CBO’s projections of outlays — particularly discretionary outlays, which the agency projects to decline in part because of the effects” of the debt limit law, the report says.

“The reduction in discretionary outlays stems from CBO’s assumption that statutory caps established by the [debt limit law] will limit discretionary funding in 2024 and 2025,” the report says. The caps result in lower spending projections in future years because CBO generally estimates discretionary spending growth by adjusting previous year spending for inflation.

Spending on the major health care programs is also expected to be lower over time, mostly because of reductions in projected Medicare spending, though that is partially offset by higher expected spending on other health programs.

The CBO’s forecast for Social Security is about the same as it was in February, though slightly different from last year’s long-term report: the trust fund for retirees and survivors is expected to run out of money to pay full benefits a year earlier, in 2032, while the life of the disability insurance fund is extended by four years, to 2052. Combining the two trust fund balances produces the same exhaustion date as forecast last year, in 2033.

The agency downsized its estimate of revenues over the three-decade period. “That overall decrease is mostly explained by lower receipts from individual income taxes — the largest source of revenues — in the current projections,” according to the report.

The agency said estimated receipts are lower in the near-term because of reduced projections of capital gains realizations, which result from lower asset values. The longer-term reduction in revenue estimates is due to the CBO’s expectation of lower distributions from pensions and individual retirement accounts.

In its long-term projections, the CBO estimates spending, revenue, deficits and debt as a share of the economy rather than providing numerical estimates as it does in its shorter-term 10-year projections.

Despite lower revenue projections, the agency now believes that debt held by the public as a share of the economy will be 9 percentage points lower at the end of the 30-year period than they thought last year, though it will be larger over the next two decades.

In an update of its economic projections since last year, the agency forecasts a larger increase in interest rates over the next decade, but less of a rise over the following two decades.

The average interest rate on 10-year Treasury notes between 2023 and 2032 is now projected to be 3.8 percent, 0.2 percentage point higher than last year’s estimate, the CBO said. The agency increased its estimate because it expects the Federal Reserve will further raise the target range for the federal funds rate and maintain that target range longer than previously expected in response to “recent persistent high inflation.”

But during the following two decades from 2034 to 2052, CBO anticipates lower interest rates than it estimated last year. The average rate on 10-year Treasury notes over the period is 4.1 percent in the agency’s projections, 0.2 percentage point lower than in last year’s estimate.

The CBO said it expects lower interest rates down the road largely as a result of slower growth in the labor force than it earlier projected for the second half of the 30-year period.

Over the course of the full three decades, generally the agency’s forecasts for inflation and economic growth are “roughly unchanged” from last year’s report, the agency said.

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