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September 23, 2020

CBO's long-term budget outlook indicates pandemic has worsened federal government's long-term fiscal imbalance

On September 21, 2020, the Congressional Budget Office (CBO) released its long-term budget outlook. The CBO reports that, due largely to the COVID-19 pandemic, the federal government's long-term fiscal imbalance has significantly worsened.

Federal debt held by the public in relation to the size of the US economy (as measured by gross domestic product (GDP)) is projected to hit 100% in 2021 and reach 108.9% by the end of the next decade, the highest since World War II (Figure 1). This ratio is projected to reach 195% by 2050, with COVID-related spending and the associated economic recession increasing this ratio by 15 percentage points.

Figure 1. Federal debt held by the public, pre- and post-COVID projections

As seen in the Figure 2, growth in federal spending is projected to outpace growth in federal revenues in the coming decades. Federal spending will rise from 23.0% of GDP in 2030 to 31.2% by 2050, while federal revenues will rise from 17.8% of GDP in 2030 to 18.6% in 2050. The growing imbalance is due to the surge in COVID-related government outlays, followed by the rise in entitlement spending — Social Security and, especially, Medicare — and the consequent rise in interest costs on the federal debt.

Between 2020 and 2050, the CBO projects that Social Security spending will increase from 5.3% of GDP to 6.3%, spending on major health care programs (e.g., Medicare) from 6.1% of GDP to 9.2%, and interest on federal debt from 1.6% of GDP to 8.1%.

Figure 2. Federal government spending and revenues, 1985 to 2050

Impact of increasing federal debt

The CBO reports that the large long-term increase in federal debt could have significant negative consequences for the US economy:

  • Decreased national saving and future income. Because increased federal debt crowds out private investment, labor productivity and real wages would be lower than otherwise.
  • Pressure for larger tax increases or spending cuts in the future. Since increased federal debt would result in higher federal interest payments, additional federal revenue would be required to provide the same level of government services or federal spending would need to be reduced.
  • Reduced ability to respond to domestic and international problems. Unexpected events such as recessions or foreign conflicts are often accompanied by significant increases in federal government spending. A long-term increase in federal debt may reduce the ability of the federal government to respond to such situations.
  • Greater chance of a fiscal crisis. CBO projects federal debt held by the public to increase to 195% of GDP in 2050. The CBO projection assumes that investors will continue to lend to the federal government and would do so at relatively low interest rates. A loss in investor confidence could be accompanied by a loss of access to capital markets or significant interest rate increases. The debt-to-GDP ratio at which such a situation might occur, however, is subject to considerable uncertainty.


Companies need to be aware that the long-term pressures on the federal government's finances persist and are a major driver of future policy. Such policy changes could include structural changes to federal entitlement programs or changes in tax policy to raise additional revenue.


Contact Information
For additional information concerning this Alert, please contact:
Quantitative Economics and Statistics Group
   • Brandon Pizzola (
   • Robert Carroll (
   • James Mackie (