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CBO Releases Long Term Budget Outlook

June 8, 2012—In its annual long term budget outlook released June 5, the Congressional Budget Office (CBO) projects that by the end of 2012, federal debt held by the public will exceed 70 percent of the gross domestic product (GDP), a dramatic increase from the end of 2008 when federal debt equaled 40 percent of the nation’s annual economic output.

CBO attributes the sharp rise in debt partly to lower tax revenues and higher federal spending caused by the severe economic downturn and from policies enacted during the past few years, but notes “the growing debt also reflects an imbalance between spending and revenues that predated the recession.”

CBO cautions, “The aging of the U.S. population and the rising costs for health care mean that the combination of budget policies that worked in the past cannot be maintained in the future. To keep deficits and debt from climbing to unsustainable levels, as they will if the set of current policies is continued, policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.”

According to CBO’s projections, if current laws remain in place, the aging of the population and the rising cost of health care would cause spending on the major health care programs and Social Security to grow from more than 10 percent of GDP today to almost 16 percent of GDP 25 years from now. By comparison, spending on all of the federal government’s programs and activities, excluding net outlays for interest, has averaged about 18.5 percent of GDP over the past 40 years. CBO warns, “If lawmakers continued certain policies that have been in place for a number of years or modified some provisions of current law that might be difficult to sustain for a long period, the increase in spending on health care programs and Social Security would be even larger. Absent substantial increases in federal revenues, such growth in outlays would result in greater debt burdens than the United States has ever experienced.”

As it has done in the past, CBO presents the long-term budget outlook under two scenarios that use different assumptions about future federal revenue and spending policies.  The extended baseline scenario assumes that current laws generally will remain unchanged and that lawmakers will allow policy shifts scheduled under current law to occur rather than making changes routinely made in the past that have resulted in increased deficits. 

Under this scenario, CBO projects the debt would decline slowly from an estimated 73 percent of GDP this year to 61 percent by 2022 and 53 percent by 2037 as a result of two factors.  Revenues would increase because of the scheduled expiration of cuts in individual income taxes enacted since 2001 and most recently extended in 2010; the growing reach of the alternative minimum tax (AMT); the tax provisions of the Affordable Care Act; the way in which the tax system interacts with economic growth; demographic trends; and other factors.

At the same time, government spending on everything other than the major health care programs, Social Security, and interest—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II. That significant increase in revenues and decrease in the relative magnitude of other spending would more than offset the rise in spending on health care programs and Social Security.

In contrast, CBO notes the budget outlook is “much bleaker” under the extended alternative fiscal scenario, which assumes that the cuts in individual income taxes enacted since 2001 would be extended; relief from the AMT for many taxpayers would be extended; and all other expiring tax provisions (with the exception of the current reduction in the payroll tax rate for Social Security) would be extended.

This scenario also assumes that through 2022, lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; that the automatic reductions in spending required by the Budget Control Act will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place); and that, as a percentage of GDP, federal spending for activities other than Social Security, the major health care programs, and interest payments will return to its average level during the past two decades.

Under those policies, federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.  CBO states, “The explosive path of federal debt under the alternative scenario underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course.”


Dave Moore
Senior Director, Government Relations
Telephone: 202-828-0559


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