CBO’s Economic and Budget Outlook 2023 – An Overview

In this article, we provide an overview on the Economic and Budget Outlook report published by the Congressional Budget Office. We explore & examine the CBO’s Economic & Budget Outlook report projections for economic growth, the federal budget, & the nation’s fiscal health. Our analysis offers insights into the CBO’s findings & what they mean for policymakers & the broader economy.

CBO’s Economic and Budget Outlook Report

On February 15, 2023, Congressional Budget Office (CBO) released their Analysis of CBO’s February 2023 Budget and Economic Outlook. The CBO’s Economic and Budget Outlook report talks about Debt, Deficit, Spending, Healthcare, Fiscal Outlook and Inflation. This article is about the Summary of this Report and concludes with our perspective. Let’s begin….

Debt Will Hit a New Record

CBO estimates that Debt is on the path of a record of 118% of GDP by 2033.The Debt will grow by $22 trillion over the next 10 years, CBO projects, this is almost double from $24 trillion by the end of FY 2022 to above $46 trillion by 2033.  

By the end of FY 2022, the Debt will grow 97% of GDP – this is double of the historic average of 47% seen over the last half-century. The Debt will record 107% of GDP by 2028. It will increase further to 118% of GDP by the end of 2033. 

It is pertinent to note that this is much higher than CBO’s own projection in May 2022 baseline, which stated that Debt will reach 110% in 2032. CBO in its statement projected that the Debt will reach 195% of GDP by 2053.

CBO stated that according to their preliminary estimates for alternative scenario the Debt is forecasted to exceed 130% of GDP by the end of 2033. The alternative scenario is if policymakers extend policies which are to expire at the end of 2025 – especially the Inflation Reduction Act’s enhanced insurance subsidies and the 2017 tax cuts – then there will be more flexible spending in the economy rather than inflation which will increase the Debt. 

Increasing Debt and deficits pose a threat to economy as a whole. It will add to fiscal pressure and which make the Federal Reserve jobs tougher to battle down inflation without recession. When there is High Debt levels then it halts economic growth, burdens budget with rising interest payments etc.….

Deficit will double

CBO estimates that deficit will double from $1.4 trillion to nearly $2.9 trillion by 2033. Over a decade the total Deficit will be at $20.3 trillion which is 6.1% of GDP. 

The Deficit in 2023 to remain at $1.4 trillion while the Deficit was $2.8 trillion in Financial Year 2021 to $1.4 trillion FY 2022. CBO estimates that the Deficit will again rise to about $1.6 trillion 2024. The estimates states that after 2017 tax cut expires the deficit will hover around $1.7 trillion between 2025 and 2027, only to increase to $1.8 trillion in 2028. The Deficit is expected to fall down to $1.8 trillion to 2029 only to rise to $2 trillion in 2030 to approach 2.9 trillion in 2033. 

In terms of share of GDP, the deficit will constantly increase from 5.4% in FY2023 to 6.1% in 2025, however it will fall back to 5.5% in 2027 only to increase steadily again after 2029 and will reach 7.3% of GDP in 2033. This is more than double of 3.6% average over the past 50 years and highest ever outside of national emergency.

The deficit for FY 2023 may be about $379 billion lower than estimated if the Supreme Court has ruled that the Administration’s student debt cancellation plan is ruled illegal.

 However, Deficits would be significantly higher if the expiring tax cuts and spending policies are extended without any adjustments and discretionary spending increases with the economy, an alternative to inflation. CBO’s preliminary estimates states that in this Alternative scenario, the deficit would reach almost $ 4 trillion (which is closer to 10% of GDP) by 2033. 

Spending will Outpace Revenue

Over the next ten (10) years, there will be an increase in Deficit and Debt and this will increase the spending which will outgrow/outpace the stagnant revenue. The expenditure/spending will total $80 trillion (i.e. 24.1% of GDP) between FY 2024 and 2033, where revenue will total $ 60 trillion (18.0% of GDP) – revenue will cover just three quarter of estimated spending – stated by CBO estimates. 

From $ 6.3 trillion in FY 2022, the total spending will increase to $9.9 trillion in 2033. In terms Share in GDP, the spending will decrease from 25.1% of GDP in 2022 to 23.5% in 2034, before it rises to 25.3% in 2033. The 50-year historical average, for comparison, is 20.9% of GDP. 

According to CBO’s estimates, revenue will decrease to 18.3% in 2034 after reaching its peak of 19.6% of GDP in FY 2022. This will hit a low of 17.4% in 2025 and raise to 18.1% of GDP – when 2017 tax cut expire. The revenue has averaged 17.3% of GDP over the past 50 years. 

This increase in spending is mainly due to increase in health, retirement, and interest payments. The Social Security and Health care spending will almost double between FY 2022-2033 says CBOs estimates. These spending will increase from $1.2 trillion to $2.4 trillion and from $1.4 trillion to $2.7 trillion, respectively. Each will grow at 1.2% of the GDP. 

Interest payments/ cost will increase from $475 billion in FY 202 to $1.4 trillion in 2033 – this is triple increase. This will total a record of 3.6% of GDP in that year.

 The Fiscal Outlook Has Worsened

In 2032, CBO estimates, the Debt will be $ 3.3 trillion higher than estimated in May 2022. This is mainly due to executive actions along with changes in the economy and the enactment of fiscally irresponsible legislation. CBOs estimates stated that their analysis differ account for changes in fiscal year 2022 and define technical changes differently.

The net deficits is to $2.3 trillion executive actions and legislative changes added, mainly $ 1.1 trillion from discretionary spending increases, $ 770 billion form honouring Out PACT Act, and $640 billion from debt cancellation and other student debt changes. These costs are partially adjusted with $ 300 billion in net savings from the Inflation Reduction Act. 

Due to higher current and expected interest rates along with the Economic changes increases the estimated deficits by another $900 billion. All other changes (technical and difference in means of financing) are reduced estimated debt by $ 525 billion. The Debt service costs will increase to $550 billion due to these legislative, economic, and technical changes.

The total debt-to-GDP is 5.2% higher than in May 2022. 

Our Perspective

With increasing of interests and high inflation the Debt and Deficits are in serious jeopardy. The policymakers should handle this with more care, else it will explode and affect the economy severely. Government should act on bringing Debt as well as Deficit to more reasonable and sustainable path. This will ensure the economic growth and also keep inflation in control.

To tame inflation it is not always the Federal Reserve need to raise the interest rates, rather the Fiscal policy actions can also be taken to tame inflation (by providing special package). As the revenue are flattening and spending are increasing, the Government should think about new avenues for Revenue generation and cut those of unviable expenditure. 

The policymakers are already facing tough times, at present. The coming years are going to be tougher which needs strong and effective policy actions. The sooner they act it will be better and beneficial for the economy as a whole. 

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