December 4, 2018
Debt and Deficits: Spending, Revenue, and Economic Growth
The Constitution provides Congress with the authority to
Debt levels generally have grown in recent decades.
manage the federal budget through its “power of the purse.”
Publicly held debt was estimated to be 78% of GDP at the
This In Focus summarizes federal budget and borrowing
end of FY2018, the highest value since FY1947. CBO’s
outcomes and trends for federal spending and revenues.
long-term forecast projects steady increases in publicly held
debt, reaching 96% of GDP by FY2028 and 152% of GDP
The Federal Budget Deficit
in FY2048.
The federal government incurs a budget deficit when total
spending exceeds revenues over the course of a fiscal year.
Congress also controls debt through the statutory debt limit,
A budget surplus occurs when revenues exceed outlays.
which constrains the amount the Department of the
Budget outcomes are dependent on general economic
Treasury may borrow. The debt limit is currently suspended
conditions. Net deficits tend to decline in periods of high
and scheduled to be reinstated on March 1, 2019.
economic growth due to both increased revenues (through a
rise in earnings and subsequent tax payments) and reduced
Trends in Spending and Revenue
outlays (through a decline in demand for unemployment
benefits and other programs). Conversely, deficits tend to
Mandatory Spending
increase in periods with lower economic growth.
Mandatory spending covers spending for programs not
controlled by annual appropriations acts. It includes
The federal budget has not produced a surplus since
spending for Social Security, Medicare, Medicaid, and
FY2001. Reduced revenues and increased spending led to
other health and old-age programs. Mandatory spending as
deficits in ensuing years, and the Great Recession and
a share of GDP has increased gradually over time.
federal response produced deficits in FY2008-FY2010
Mandatory outlays were estimated to be 12.7% of GDP in
(averaging 9.0% of gross domestic product [GDP]), which
FY2018 (61% of total federal spending), above the
were the largest of the post-World War II era. Following a
FY1968-FY2017 average of 9.8% of GDP.
period of smaller deficits, real deficits have increased in
each year since FY2015. The budget recorded a deficit of
Mandatory spending is projected to continue growing as a
4.0% of GDP in FY2018, which is larger than the average
share of the economy, due to increased eligibility for old-
deficit from the preceding 50 years (2.9% of GDP from
age and retirement programs, increased longevity of
FY1968 to FY2017).
participants in those programs, and rising health care costs.
The latest CBO long-term baseline projects that mandatory
The 2018 Long-Term Budget Outlook issued by the
spending will equal 15.2% of GDP in FY2028 (which
Congressional Budget Office (CBO) in June projects that
would be the highest value on record) and 17.6% of GDP in
under current law, deficits will remain higher than their
FY2048. Rising Social Security and Medicare spending
historical average for the next 30 years, with deficits of
explains most of those future increases.
5.1% of GDP in FY2028 and 9.5% of GDP in FY2048.
Figure 1. Spending, Revenues, and the Deficit:
Federal Debt
FY2018, FY2028 and FY2048
Federal debt is the accumulation of government borrowing
activity. Debt levels increase when there are budget deficits,
net outflows for federal credit programs, or increases in
intragovernmental debt. Treasury is tasked with managing
debt in a manner that maximizes transparency and
minimizes interest costs. The debt measurement generally
of chief interest to economists is publicly held debt, which
excludes debt held in federal government accounts.
Changes in federal debt reflect implicit policy choices
concerning the distribution of government activity across
generations. Debt increases in one time period constrain the
choices available in later periods. Large and persistent debt
levels may reduce public confidence in the government’s
ability to fulfill its borrowing obligations, which could
increase long-term borrowing costs.
Source: CRS graphic using Congressional Budget Office data.
FY2028 and FY2048 values are baseline projections.
https://crsreports.congress.gov
Debt and Deficits: Spending, Revenue, and Economic Growth
Discretionary Spending
Long-term projections put revenues at 19.8% of GDP by
Discretionary spending covers spending for programs
FY2048. Most of the increase in revenues as a share of
controlled by annual appropriations laws, including for
GDP is attributable to a rise in individual income tax
most federal agencies and national defense programs.
receipts. Revenues tend to rise relative to the size of the
Discretionary spending as a share of GDP has declined
economy when income rises faster than inflation, pushing
gradually over time. Discretionary outlays were estimated
taxpayers into higher tax brackets. Although long-term
to be 6.4% of GDP in FY2018 (31% of total federal
projections show revenues rising relative to the size of the
spending) below the FY1968-FY2017 average of 8.5% of
economy, projected increases in revenues do not keep pace
GDP. Total FY2018 discretionary spending was almost
with projected increases in spending, and the result is rising
equally split between defense (49%) and nondefense
deficits and higher levels of debt.
programs (51%).
Causes and Consequences of the Debt
The CBO long-term baseline projects that discretionary
and Deficits
spending will be 5.4% of GDP in FY2028 (which would be
If the persistent federal budget deficits and growing federal
the lowest value on record) and 5.5% of GDP in FY2048.
debt that is projected through FY2048 are allowed to occur,
Future trends in discretionary spending will depend in part
this outcome would hurt the economy and constrain future
on the congressional response to the FY2019-FY2021
budget policy. Specifically, the accrual of debt
discretionary spending caps imposed by the Budget Control
Act (P.L. 112-25). CBO projections assume the
financed from domestic sources would reduce national
discretionary spending caps proceed as scheduled, though
saving and income in the long term, reducing investment
they were modified to allow for greater spending from
in capital that leads to productivity growth and higher
FY2013 through FY2019.
wages;
Net Interest
financed from foreign sources would increase the trade
Net interest payments measure the payments made by the
deficit and the obligations to pay foreign investors
federal government to finance its borrowing, and they are a
future returns;
function of the stock of debt held by the public and
prevailing interest rates. Net interest payments were
would increase the government’s interest costs—
estimated to equal 1.6% of GDP in FY2018 (8% of total
constraining the ability of lawmakers to encourage
federal spending), below the FY1968-FY2017 average of
growth-enhancing investments, such as infrastructure;
2.0% of GDP. The latest CBO long-term baseline projects
that net interest payments will rise as interest rates return to
would limit lawmakers’ ability to respond to future
historical norms, reaching 3.1% of GDP in FY2028 and
recessions, natural disasters, or other unforeseen events.
6.3% of GDP in FY2048.
In some cases—such as in Iceland and Greece—large
Revenue
federal debt and deficits have led to financial crises where
Federal revenues come from several sources, including
investors were unwilling to finance government borrowing
individual income taxes, corporate income taxes, and excise
without receiving very high interest rates along with
taxes. Revenues also are collected through payroll taxes,
commitments to sharply reduce government deficits.
which are dedicated to social insurance programs. Revenue
Although the tipping point for this type of event is
as a share of GDP has fluctuated over time. Revenues were
unknown, the International Monetary Fund concluded the
estimated to be 16.6% of GDP in FY2018, below the
near- and medium-term risk for the United States to be low.
FY1968-FY2017 average of 17.4% of GDP.
Magnitude of Policy Changes Required to Address
Revenues as a share of GDP were 17.3% in FY2017, in line
the Deficit
with the historical average. The decline in revenues as a
The CBO 2018 Long-Term Budget Outlook estimated the
percentage of GDP in FY2018 is largely attributable to the
magnitude of policy adjustments that would be required to
2017 tax revision (P.L. 115-97). On net, taxes paid by
meet two federal debt targets for FY2048—maintaining the
individuals and businesses are expected to be lower in 2018
current level of 78% of GDP and the 50-year average of
than they were in 2017. Most of the provisions affecting
41% of GDP. If addressed beginning in FY2019,
individuals, however, are scheduled to expire at the end of
maintaining debt at its current level (78% of GDP) could be
2025.
attained by reducing spending, increasing revenue, or a
combination of the two by 1.9% of GDP (3.0% of GDP to
The CBO long-term baseline projects that revenues will be
meet the 50-year average of debt as a percentage of GDP).
18.5% of GDP in FY2028. This higher level of revenues as
For example, this change could involve a 10% (15%) cut in
a percentage of GDP was last observed in the late 1990s
spending or an 11% (17%) increase in revenues. Smaller
and early 2000s, when the budget last recorded a surplus.
near-term changes or delays in making these changes would
Future trends in revenues depend in part on the
require even larger future changes to meet either of these
congressional response to the expiring individual income
goals.
tax reductions and other provisions in the 2017 tax revision
that raise additional revenue over time. Postponed health
Grant A. Driessen, Analyst in Public Finance
taxes also are expected to begin generating additional
Molly F. Sherlock, Specialist in Public Finance
federal revenue as they take effect over time.
Donald J. Marples, Specialist in Public Finance
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Debt and Deficits: Spending, Revenue, and Economic Growth
IF11037
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