The basic story is familiar. Low revenues coupled with rising outlays on health-related programs and Social Security drive permanent, rising primary deficits as a share of the economy. Net interest payments also rise substantially relative to GDP due to high pre-existing debt, rising primary deficits, and gradually increasing interest rates. Unified deficits and public debt rise accordingly.
Under current law for the next 10 years, the CBO’s projections imply that persistent primary deficits will average 3.0% of GDP. Net interest payments will rise from 2.4% of GDP currently to 3.6% in 2033, an all-time high. The unified deficit, and even the cyclically adjusted deficit, will exceed 7% of GDP at the end of decade. Debt will rise from 98% of GDP currently to 118% by 2033, another all-time high.
Over the following two decades, the projected trends are even less auspicious. Primary deficits rise further as spending on Social Security and health-related programs continue to grow faster than GDP and revenue growth remains anemic. The average nominal interest rate on government debt rises to exceed the nominal economic growth rate by 2046, setting off the possibility of explosive debt dynamics. By 2053, relative to GDP, annual net interest payments exceed 7%, the unified deficit exceeds 11%, and the public debt stands at 195%. All these figures would be all-time highs (except for deficits during World War II and in the first two years of the COVID-19 pandemic) and would continue to grow after 2053.
It’s true, of course, that $1 trillion doesn’t buy what it used to. That amount in 1981 would purchase about $3 trillion worth of stuff today. The best way to measure the national debt over long periods of time is to compare it to America’s gross domestic product (GDP), a rough estimate of the size of the country’s economy in a given year.
In the early 1980s, for example, even as the gross national debt exceeded $1 trillion for the first time, the national debt was less than 40 percent of GDP. The national debt is now equivalent to the country’s GDP and is on pace to be nearly 200 percent of GDP by the middle of the century, as this chart from Brian Riedl, a deficit hawk and former Republican Senate staffer now working at the Manhattan Institute, helpfully illustrates:
Once per calendar quarter, the state of Michigan conducts a Consensus Revenue Estimating Conference that provides updates on both the national and state economies and the state’s fiscal outlook. The May conference each year is especially significant because it sets the official revenue targets for the next fiscal year’s state budget.
Another chart broke down the components of personal income. Over the previous four quarters, personal income was nearly $3,000 higher than pre-pandemic forecasts had expected. However, employee compensation actually declined by about half that amount. The entire increase is the result of the 53 percent increase in federal transfer payments that have floated U.S. households over the past year.
The numbers here are simply staggering. Consider the fact that in 2019, the last full budget year before the pandemic, the federal government spent a grand total of $4.4 trillion. Combined with the bill that already passed in March, this plan represents nearly $5 trillion in new spending.
Though the specifics of the proposal are in flux, it seems to bear some similarities to the $1.9 trillion American Rescue Plan (ARP) that Biden signed into law earlier this month. That bill was ostensibly a COVID-19 relief measure, but only a small percentage of the money was actually directed toward dealing with the pandemic. The upcoming $3 trillion package will be called an infrastructure bill, but the Times says only about $1 trillion would be directed toward such traditional infrastructure items as roads, bridges, ports, and improvements to the electric grid.
A sizable portion, about $500 billion, is a bailout of state and local governments that for the most part do not need one. While state tax revenues took a small hit from the pandemic and associated economic lockdowns, the damage is far smaller than was once feared. States should handle their own finances.
But it’s not just a bailout; it’s a bailout in which the funding is allocated based on the size of each state’s unemployed population. In other words, states that imposed draconian and unnecessary economic lockdowns during the past year are going to get a larger share of the federal cash than states that managed to balance public health needs and the economy—an arrangement that New Hampshire Gov. Chris Sununu rightly calls “outrageous.”