CBO Projects Deficits and Debt Explode Under Permanent TCJA Extension
We Are So Screwed
The Congressional Budget Office (CBO) released projections of budget deficits and debt under two alternative scenarios late last week that are, quite frankly, very troubling. The CBO’s alternative scenarios are interesting because, in the past, they’ve tended to look at congressional behavior rather than current law. In other words, just because current law says “Law X” will expire at the end of 2025 doesn’t mean it will because Congress has a history of extending it.
This time around, at Rep. David Schweikert's (R-AZ) request, the CBO looked at two different scenarios. Both scenarios assume the Tax Cuts and Jobs Act (TCJA)of 2017 is extended permanently and that there are no other changes to fiscal policy. The difference is that “Alternative Scenario #1” only assumes TCJA is extended while “Alternative Scenario #2” adds the assumption of higher interest rates.
Under the baseline published in January by the CBO, the deficit as a percentage of gross domestic product (GDP) is projected to grow from 5.5 percent in FY 2026 to 6.2 percent in FY 2035. Under the extended baseline, FY 2036 through FY 2054, deficits grow from 6.3 percent to 8.5 percent.
The share of the debt held by the public, meanwhile, is projected to grow from 103.3 percent of GDP to 118.0 percent. Under the extended baseline, debt is projected to grow from 120.0 percent of GDP in FY 2036 to 166.2 percent in FY 2054.
If TCJA is extended permanently (Alternative Scenario #1), the deficit will rise to 6.2 percent of GDP in FY 2026 and reach 7.9 percent in FY 2035. In the long term, the deficit is projected to be 8.1 percent of GDP in FY 2036. In FY 2054, the deficit is projected to reach 12.3 percent of GDP.
If TCJA is permanently extended and interest rates rise, the deficit is projected to reach 8.8 percent of GDP in FY 2035. Although the CBO didn’t project through FY 2054, the deficit is projected to rise from 9.1 percent of GDP in FY 2036 to 16.6 percent in FY 2052.
Putting that deficit figures into context, the deficit hit 14.7 percent of GDP during the COVID-19 pandemic. The budget deficit during the Great Recession peaked at 9.8 percent of GDP in FY 2009. The difference between those deficits and the deficits the CBO says we could run is that what we saw in the pandemic and the Great Recession were temporary. The budget deficits we’ll run in the future are consistently high relative GDP. That’s unsustainable and will push up interest rates, making Alternative Scenario #2 more realistic in the absence of fiscal reform.
The share of the debt held by the public relative to GDP will also skyrocket, eventually exceeding 200 percent under both scenarios. Under the baseline, debt as a share of GDP will reach 166.2 percent in FY 2054. In Alternative Scenario #1, debt hits roughly 170 percent of GDP in FY 2045. It exceeds 170 percent of GDP in FY 2042 in Alternative Scenario #2 and 245.8 percent of GDP in FY 2052.
CBO projects $113.217 trillion in cumulative budget deficits from FY 2025 through FY 2054. Budget deficits would be $37.150 trillion greater under Alternative Scenario #1 ($150.368 trillion) and $46.710 trillion greater under Alternative Scenario #2 ($159.927 trillion).
The share of the debt held by the public will also grow higher under both scenarios. The baseline projects debt to reach almost $51 trillion in FY 2035. In the extended baseline, debt reaches $178.8 trillion in FY 2054. Debt is $178.804 trillion in FY 2054 in Alternative Scenario #1, or $37.150 trillion higher, and $188.362 in FY 2054 in Alternative Scenario #1, or $46.710 higher.
Now, the CBO doesn’t consider the spending offsets that we could see as part of the budget reconciliation package. The House budget proposal calls for at least $1.5 trillion in spending cuts over ten years. However, Senate Republicans are pushing an accounting gimmick that would have the CBO assume the TCJA doesn’t expire, making the need for spending offsets a moot point. Ultimately, the parliamentarian will determine whether that fits in the parameters of budget reconciliation. Republicans, of course, can override the parliamentarian. That would be a bold move, to say the least.
Debt at that level is difficult to grasp, but it’s the trajectory we’re on because of fiscal mismanagement. Specifically, the failure to modernize programs like Social Security and Medicare. Add to that making TCJA permanent. Ordinarily, I’m on board with tax cuts, but it’s really hard to get on board with this because of the state of the federal government’s finances.