Debt and Deficits: Spending, Revenue, and Economic Growth

Debt and Deficits: Spending, Revenue, and Economic Growth

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Updated December 8, 2022
Debt and Deficits: Spending, Revenue, and Economic Growth
The Constitution provides Congress with the authority to
made by previous generations while realizing little to no
manage the federal budget through its “power of the purse.”
benefit of those choices. Large and persistent debt levels
This In Focus summarizes federal budget and borrowing
may also reduce public confidence in the government’s
trends and discusses related issues with spending, revenues,
ability to fulfill its borrowing obligations, which could
and economic policy.
increase long-term borrowing costs.
The Federal Budget Deficit
Debt levels generally have grown in recent decades.
The federal government incurs a budget deficit when total
Publicly held debt is projected to be 96% of GDP at the end
spending exceeds revenues over the course of a fiscal year.
of FY2023, roughly triple the value recorded at the end of
A budget surplus occurs when revenues exceed outlays.
FY2001 (32% of GDP). CBO’s long-term forecast projects
Budget outcomes depend on general economic conditions.
accelerated increases in publicly held debt in ensuing
Deficits tend to decline in periods of high economic growth
decades, reaching 110% of GDP by FY2032 and 185% of
due to both increased revenues (through a rise in earnings
GDP in FY2052. Congress can control the federal debt
and subsequent tax payments) and reduced outlays (through
through the statutory debt limit, which constrains the
a decline in demand for unemployment benefits and other
amount Treasury may borrow. The debt limit is currently
programs). Conversely, deficits tend to increase in periods
set to $31.4 trillion, which under current projections will be
with lower economic growth.
reached sometime in the next few months.
The federal budget has produced budget deficits in every
Trends in Spending and Revenue
year since FY2001. The historic economic shocks of the
2007-2009 Great Recession and COVID-19 pandemic,
Figure 1. Spending, Revenues, and the Deficit:
along with the ensuing federal responses generated the five
FY2023, FY2032 and FY2052
largest real federal deficits (measured as a share of total
30 % of GDP
30
economic output) since World War II, with real deficits
averaging 9.0% of gross domestic product (GDP) in
Deficit
Net Interest
25
25
FY2009-FY2011 and 13.7% of GDP in FY2020-FY2021.
The average real deficit in other years since FY2001 (3.2%
Discretionay
20
20 Outlays
of GDP), however, still exceeded the comparable amount
from FY1973 through FY2001 (2.5% of GDP).
15
15 Mandatory
The Congressional Budget Office (CBO) May 2022 Budget
10
10 Outlays
and Economic Outlook projects a federal deficit equal to
Revenues
3.7% of GDP in FY2023. Looking ahead, the CBO 2022
5
5
Long-Term Budget Outlook projects that under current law
deficits will remain higher than their historical average for
0
0
FY2023
FY2032
FY2052
the next 30 years, with deficits of 6.1% of GDP in FY2032

and 11.1% of GDP in FY2052 (see Figure 1).
Source: CRS graphic using Congressional Budget Office data.
FY2032 and FY2052 values are baseline projections.
Federal Debt
Federal debt is the accumulation of all historical
Mandatory Spending
government borrowing activity. Debt levels increase when
Mandatory spending covers spending for entitlement and
there are budget deficits, net outflows for federal credit
other programs not controlled by annual appropriations. It
programs, or increases in intragovernmental debt. Treasury
includes spending for Social Security, Medicare, Medicaid,
manages debt in a manner that maximizes transparency and
and other health and old-age programs.
flexibility while minimizing interest costs. The debt
measurement generally of most interest to economists is
Mandatory outlays are projected to be 14.0% of GDP in
publicly held debt, which excludes debt held in federal
FY2023 (62% of total federal spending), above the
government accounts (i.e., intragovernmental debt).
FY1973-FY2022 average of 10.9% of GDP (52% of total
spending), reflecting a gradual increase in mandatory
Changes in federal debt reflect implicit policy choices
spending in recent decades. The latest CBO long-term
concerning the distribution of government activity across
baseline projects that mandatory spending will continue to
generations. Increases in real debt in one period may
grow under current law, equaling 14.9% of GDP in FY2032
constrain the choices available in later periods. It may also
(which would be the highest value on record) and 17.0% of
lead future generations to bear the financial cost of choices
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Debt and Deficits: Spending, Revenue, and Economic Growth
GDP in FY2052. Rising Social Security and Medicare
investments (e.g., certain infrastructure) and spending (e.g.,
spending explains most of those future increases.
research and development) can increase the productive
capacity of the economy. However, persistent federal
Discretionary Spending
budget deficits and growing debt like those in CBO’s long-
Discretionary spending is controlled by annual
term projections would reduce total economic growth and
appropriations, and pays for the operations of most federal
constrain future budget policy. Specifically, the accrual of
agencies and national defense programs. Discretionary
debt
spending as a share of GDP has declined gradually over
time.
 financed from domestic sources would reduce long-term
national saving and income, reducing capital investment
Discretionary outlays are projected to be 6.7% of GDP in
that leads to productivity growth and higher wages;
FY2023 (30% of total federal spending), below the
FY1973-FY2022 average of 8.0% of GDP (38% of total
 financed from foreign sources would increase the trade
spending). Defense discretionary spending is projected to
deficit and the future obligations owed to foreign
equal 3.0% of GDP in 2023, with nondefense discretionary
investors;
spending projected to equal 3.7% of GDP. The CBO long-
term baseline projects that discretionary spending will equal
 would increase the government’s interest costs—
6.2% of GDP in FY2032 and 6.0% of GDP in FY2052.
constraining lawmakers’ ability to encourage growth-
enhancing investments, such as infrastructure;
Net Interest
Net interest payments are the cost to the federal government
 would limit lawmakers’ ability to respond to future
of financing debt held by the public, and are a function of
recessions, natural disasters, or other unforeseen events.
the stock of debt and prevailing interest rates. Net interest
payments can shift dramatically with changes in investor
For example, in the early 2010s, large debt and deficits in
sentiment, domestic and worldwide economic conditions,
Iceland and Greece led to financial crises where investors
and monetary policy, and are much less subject to
were unwilling to finance government borrowing without
congressional control than other federal spending in the
receiving very high interest rates along with commitments
short- and medium-term.
to reduce government deficits. Those episodes are generally
believed to have significantly increased the severity and
Net interest payments are estimated to equal 1.7% of GDP
length of recessions in those countries.
in FY2023 (8% of total federal spending), slightly lower
than the FY1973-FY2022 average of 2.0% of GDP (10% of
Budget observers have generally increased their predicted
total spending). The CBO 2022 Long-Term Budget Outlook
level of real U.S. federal debt needed to trigger such an
projects significant increases in future net interest
event relative to comparable predictions before the Great
payments, reaching 3.4% of GDP in FY2032 and 7.2% of
Recession. Such estimates, however, are subject to
GDP in FY2052.
substantial uncertainty. The International Monetary Fund
recently found the short- and medium-term risk for the
Revenue
United States for such an event to be low.
Federal revenues come from several sources, including
individual income taxes, corporate income taxes, and excise
Magnitude of Policy Changes Required to Stabilize
taxes. Revenues also are collected through payroll taxes
Long-Term Debt
(the second largest revenue source behind individual
The CBO long-term baseline estimated the magnitude of
income taxes), which are dedicated to social insurance
policy adjustments that would be required for real federal
programs. Revenues as a share of GDP have fluctuated over
debt to equal 100% percent of GDP in FY2052—roughly
time.
its current level. If addressed beginning in FY2027, CBO
projected that such a goal could be attained by reducing
Revenues are projected to be 18.6% of GDP in FY2023,
spending, increasing revenue, or a combination of the two
higher than the FY1973-FY2022 average of 17.6% of GDP.
by 2.8% of GDP for each of the ensuing 25 years. Such a
Future trends in revenues depend in part on the
change would be equivalent to a 15% increase in total
congressional response to the expiring individual income
federal revenues or an 11% reduction in total federal
tax reductions and other provisions in the 2017 tax revision
outlays from FY2027 through FY2052.
(P.L. 115-97). The CBO long-term baseline projects that
revenues will be 18.2% of GDP in FY2032, and 19.1% of
Long-term economic growth will affect the policy changes
GDP by FY2052. Most of the long-term increase in
needed to reach certain targets. For example, though real
revenues as a share of GDP is attributable to a rise in
annual deficits were much larger from FY1941 to FY1950
individual income tax receipts. Revenues tend to rise
(averaging 9.3% of GDP) than from FY2011 to FY2020
relative to the size of the economy when income rises faster
(averaging 5.5% of GDP), higher economic growth in the
than inflation, pushing taxpayers into higher tax brackets.
1940s led to real debt increases that were smaller over the
FY1941-FY1950 period (35% of GDP) than the FY2011-
Causes and Consequences of the Debt
FY2020 period (40% of GDP).
and Deficits
Deficits and debt are not inherently harmful to the
Grant A. Driessen, Analyst in Public Finance
economy. Borrowing to finance productive long-term
Donald J. Marples, Specialist in Public Finance
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Debt and Deficits: Spending, Revenue, and Economic Growth

IF11037

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