UNITED STATES OF AMERICA
Two weeks ago, the Congressional Budget Office (CBO) updated its budget and economic projections, which now show that federal deficits are projected to be $2.1 trillion higher over the next decade than the agency had projected just a few months ago. The increase in the cumulative deficit is primarily due to legislative and technical changes.
LEGISLATIVE CHANGES
The legislative changes are the result of legislation enacted since the CBO released its baseline projections in February. Those changes increased projected deficits between 2025 and 2034 by $1.6 trillion.
Most of the legislative changes ($945 billion) are due to the incorporation of supplemental appropriations approved in April. That legislation provided an additional $95 billion in fiscal 2024 funding for Ukraine, Israel and countries in the Indo-Pacific region. Because these funds are not limited by funding limitations, the benchmark rules direct CBO to incorporate them in future years (adjusted for inflation).
Appropriations under the Consolidated Appropriations Act of 2024 and the Additional Consolidated Appropriations Act of 2024 were also larger than anticipated in February. Extrapolating that higher level of funding added $343 billion to the CBO projections. About three-quarters of the spending increase went to defense and a quarter to non-defense programs.
Because legislative changes increased projected annual deficits, net interest outlays also increased by $247 billion over the 10-year period, bringing the total of legislative changes to approximately $1.6 trillion. .
TECHNICAL CHANGES
Technical changes are not legislative or attributable to economic conditions. They are the result of factors such as revisions to CBO models, new information or data from federal agencies, and changes in the way programs are administered. Such changes increased deficits over the 2025-2034 period by $1.1 trillion.
Due to technical changes, revenue is expected to decline by $324 billion over the 10-year period. The largest change in revenue is due to corporate income taxes, which are projected to decrease by $381 billion due to improvements in models resulting from new available data.
Technical reviews of mandatory disbursements resulted in a projected spending increase of $399 billion over 10 years. The largest increases are for Medicaid and tax credit disbursements for premiums and related expenses. In the case of Medicaid, technical revisions increased CBO projections by $267 billion over the period 2025-2034; For premium tax credits and related expenses, the CBO recorded an increase of $244 billion in disbursements.
Net interest outlays are projected to increase by $348 billion due to technical changes, primarily due to an increase in debt servicing costs.
ECONOMIC CHANGES
Changes in the economic forecasts underlying CBO's base budget altered forecasts for GDP, interest rates, the labor force, wages and salaries, and inflation, among others. The influence of these changes reduced the cumulative ten-year deficit by $0.6 trillion, primarily due to a projected increase in revenues.
In total, CBO increased projected revenues by $521 billion over the 10-year period. Individual income taxes increased by $612 billion compared with previous projections, in part because CBO expects mortgage interest payments, which are deductible from federal taxes, to be lower than previously projected. Some of that revenue increase is offset by a decline in Federal Reserve remittances, which are $176 billion lower over the 10-year period because of the expectation of tighter monetary policy over a longer period.
CONCLUSION
CBO's updated projections highlight the country's unsustainable fiscal outlook, showing that deficits will continue to rise significantly over the next decade. In addition, the update demonstrates that various legislative, technical, and economic factors may have significant effects on our fiscal outlook. Given the country's troubling fiscal trajectory, it is important for policymakers to understand the factors affecting the debt outlook and prioritize responsible budgeting that puts U.S. finances on a better path.
