Since his inauguration on January 20, 2021, President Joe Biden has signed into law significant legislation to help the American people and economy. The American Rescue Plan Act built on the bipartisan COVID-19 recovery legislation enacted during the Trump administration to ensure a robust response to the pandemic. President Biden also signed the Inflation Reduction Act, which provided the largest investment in clean energy in U.S. history, offset primarily through taxing corporate profits, going after Big Pharma’s high drug prices, and raising revenues through better enforcement of existing tax law. Finally, with the CHIPS and Science Act, the Infrastructure Investment and Jobs Act, and the PACT Act—which expanded U.S. Department of Veterans Affairs (VA) health care and benefits to better cover veterans exposed to toxic chemicals—the administration delivered benefits to both the American public and the American economy.
These laws helped usher in the fastest recovery in decades. The United States now leads G7 countries in real economic growth, on both a total and per-capita basis. Median wages have outpaced inflation, leaving the typical worker better off than they were before the pandemic began. And wage inequality has fallen due to the strongest wage growth benefiting lower-wage workers, erasing about 40 percent of the increase in wage inequality since President Ronald Reagan.
All of this coincided with a dramatic reduction in the Congressional Budget Office’s (CBO) projections of long-term primary—or noninterest—deficits and, therefore, the ratio of debt to gross domestic product (GDP).* Long-term projections of primary deficits are significantly lower than they were in the last pre-COVID-19 baseline. And surprisingly, even though the country took on large amounts of new debt to ensure a strong recovery from the COVID-19 pandemic and ensuing recession, the CBO’s long-term projections of debt are lower now than they were in the last pre-COVID-19 baseline—before the emergency costs were incurred. There has been particularly significant progress made in lowering the rate of cost growth in Medicare, due in part to the provisions in the Inflation Reduction Act that lowered prescription drug costs both for the government and for seniors. Notably, the primary deficit reduction stems primarily from lower spending.
Not only has the CBO decreased its projections of primary deficits and debt since 2020; it has also lowered its projections of primary deficits for every year of the Biden administration. The 2024 projections are lower than those in 2023, which were lower than those in 2022, which were lower than those in 2021.
The biggest unknown with respect to the future debt ratio trajectory is the Trump tax cuts, a significant portion of which are set to expire after 2025. Extending those tax cuts without any offsets would increase the upward pressure on the debt-to-GDP ratio by more than 50 percent, significantly increasing deficits and debt.**
The author would like to thank Jean Ross, Brendan Duke, and Emily Gee for their helpful suggestions and Jessica Vela for both helpful suggestions and research assistance.
See also
* Debt ratio stability is determined by three things: 1) the primary deficit, 2) the difference between the rate of economic growth and the U.S. Department of the Treasury interest rate on government debt, and 3) the current level of debt as a percentage of GDP. The size of the primary deficit is the single-largest contributor to whether the debt ratio is rising, stable, or falling over the long run.
** The fiscal gap measures the net present value of the primary deficit as a percentage of GDP required to ensure the debt-to-GDP ratio at the end of the of period is no higher than at the beginning of the period. The current fiscal gap is roughly 1.5 percent of GDP. On a net present value basis, extending the Trump tax cuts has a primary cost of roughly 1.0 percent of GDP, meaning that permanently extending them would increase the fiscal gap by roughly 1.0 percent of GDP.
Methodology
To ensure apples-to-apples comparisons, the author made a few adjustments to the original CBO projections. Unless directly instructed otherwise by the House Budget Committee and Senate Budget Committee, the CBO, by law, assumes all discretionary (annually appropriated) programs will continue to be funded in each future year, with the funding growing with inflation. The author modified the projections to instead remove the extrapolation of one-time emergency funding, with the exception of emergency-designated money that is intended to fund base operations. For years prior to fiscal year 2022, the author fully wrapped Overseas Contingency Operations (OCO) funding into base appropriations; starting with fiscal year 2022, OCO funding was fully wrapped into base appropriations.
Starting in the 11th year of each long-term budget projection, the CBO assumes discretionary funding grows with the GDP rather than inflation—and starting in 2023, the CBO implemented a five-year transition period to grow from the rate of inflation to the rate of GDP growth. In each of the five projections examined, the author adjusted discretionary outlays to all grow with inflation through the same year as in the 2024 projection (2034), rather than always through the 10th year, and, from there, begin a five-year transition period to all growing with GDP in the same year as in the 2024 projection (2039). For the 2023 long-term budget outlook, the author adjusted the funding stream for the Cost of War Toxic Exposures Fund to make it consistent with the Fiscal Responsibility Act and lowered the later-year funding levels accordingly. The author adjusted both the 2023 and 2024 projections to incorporate the budget side deal and increased future discretionary levels commensurately. GDP projections were rebased to match the latest actual value prior to the projection years.
The net effect of these changes, taken together, is to somewhat diminish the extent to which primary deficits and debt net of financial assets have decreased. For transparency, projections of primary deficits and debt are shown both in these modified versions and in the CBO’s original versions.