THE CONGRESSIONAL BUDGET OFFICE (CBO) FORECASTS THE FUTURE


 

According to the latest Congressional Budget Office (CBO) long-range forecast, government revenue will be $1.3 trillion more in 2030 than in 2020. Government debt will increase $10 trillion, from $30 trillion to $40 trillion in the same time period. If the average interest rate in 2030 is 4%, below the long-term average of 5%, then interest on the national debt in 2030 will be about $1.0 trillion higher than in 2022. Thus, most of the increase in federal tax revenue will go to pay for the increased interest expense on the national debt.

 

In every year in this interval, the deficit - the increase in the national debt - will be greater than the increase in revenue.

 

If the national debt rises to $50 trillion over the next eight years, as some analysts expect, then the increase in interest expense, at 4%, will be about $1.4 trillion. Thus, all the increase in revenue will just pay for the increase in interest expense.

 

CBO forecast is probably optimistic. By law, the forecast cannot include a recession or any other unusual adverse event like future viruses. The inflation of 2022 is pushing up interest rates faster than expected. The energy expenses of the government are higher. Based on past experience, it is likely that at least one recession will occur in the next eight years.

 

The forecast was made before the new Biden administration spending programs were passed and student debt forgiveness was announced. The spending bills indicate that the cost of switching to renewables, modernizing the electricity grid, and decarbonizing is going to be very high in the future. Related, the cost of containing the consequences of past emissions and pollution will also be high. Defense spending will probably be higher than projected because of the need to rebuild weapons inventory and accelerate the design and production of new weapons systems.

 

The Fed owns government debt – bonds and government-backed mortgages - and receives interest income. After expenses, the net interest income is returned to the federal government, reducing the interest expense on the national debt and the deficit. From 2010 to 2021, the Fed returned over $1 trillion in interest payments to the Treasury. 

 

The Fed has financed the stimulus spending bills by creating electronic money. At the beginning of 2020, Fed holdings of various forms of government debt was $4.2 trillion. As of August 17, 2022, the total was $8.8 trillion. $3.8 trillion was balanced by reserve holdings by bank deposits. The Fed now pays floating-rate interest on these deposits. But interest rates on assets are fixed until the bonds or mortgages mature. The cost of this new debt appears fixed at low rates but is actually determined by changing short-term interest rates on bank reserve holdings. So a rise in short-term interest rates cuts into the Fed’s net income and remittances to the government. If short-term interest rates stay high or rise, the Fed’s net income could disappear or even turn negative. The government’s interest expense is higher and deficits larger.

 

The Fed can reduce its holdings, and interest expense, by selling off government debt. It is currently doing this. But the government must replace this debt with new debt at higher interest rates, again increasing net interest expense and larger deficits.

 

Eventually, the U.S. government will only be able to finance all of its programs with structural deficits, rising debt and probably higher debt/GDP ratios, and higher interest rates. I would not like to be a member of the CBO committee that makes economic projections in 2030.

 

   

 

 

 

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