On July 20th, the CBO published, “The Long-Term Budget Outlook Under Alternative Scenarios for the Economy and the Budget”. The CBO is the government agency that determines the most likely budgetary impact of legislation. They are also the people responsible for estimating the future annual deficits or surplus and the projection of accumulated debt. The recent publication shows us how little anyone knows about how dire, or maybe not so dire, our fiscal outlook is. The purpose of the analysis, as the title suggests, was to illustrate the wide variance that could occur versus their baseline projections. In other words, what if interest rates are higher or lower than their guess, or productivity growth or six other variables assessed in the report. While their job is deduce a number of essentially impossible long-term macro estimates, the harder part is guessing what spending and taxes will look like. How can they guess what will be coming out of the D.C. sausage factory next year or five years from now?  

The CBO wrote, “If current laws governing taxes and spending generally remained unchanged, the federal budget deficit would nearly double in relation to gross domestic product (GDP) over the next 30 years, driving up federal debt…In CBO’s extended baseline projections, debt held by the public rises from 98 percent of GDP in 2023 to 181 percent of GDP in 2053.” That is the baseline, but the chart below shows how far off that projection could be.

Take a look at the chart in the upper-right quadrant. That chart tells you that the difference between rates surprising to the upside vs surprising to the downside equates to a difference in the debt equivalent to roughly 100% of future GDP over the next three decades. The CBO assumes borrowing costs revert to 4% over this time period. My guess is that after decades of global money printing, debt monetization and competitive currency devaluation, that number is probably low. The chart in the upper-left quadrant shows the same wide spectrum of outcomes depending on future productivity growth. Most economists will tell you that the ability to predict productivity growth is negligible. For what it’s worth, the current trend is quite clearly to the downside.

I was also struck by this excerpt: “In CBO’s extended baseline projections, discretionary spending is smaller, and revenues are larger, on average, than they have been as a share of GDP over the past 30 years.” Why would that be? As Fitch reminded us last week, the political will toward fiscal prudence is not going in the right direction.

We are currently running massive budget deficits that are stimulating growth at a time when inflation remains problematic. The current level of excess spending is leading the economy to grow faster than its capacity. While we don’t know where rates, GDP growth or productivity will go in the future, the CBO’s baseline case takes us rapidly into unprecedented territory and there is significant risk that the baseline is optimistic. In May, the CBO estimated that our deficit in 2023 would be $1.5 Trillion, three months later, that estimate is higher by $200billion.

Problems that can be foreseen tend to be avoided. Unfortunately, as Congress becomes more politically polarized, basic governing much less solutions may be hard to come by.  

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