Uncle Sam is seeing a surprising surge in federal revenue and waning pandemic spending that will drastically cut the federal deficit this year, delivering a brief respite before the pain deepens in the latter half of this decade, the Congressional Budget Office reported Wednesday.
The deficit this year will be about $1 trillion, down from the $2.8 trillion recorded in 2021, CBO said.
But Congress’ spending spree over the last year has added trillions of dollars to the longer-term deficit projection, adding to the fiscal drags of an aging population and higher interest costs. All told, the federal government will run $14.5 trillion in the red over the next decade, or $2.4 trillion worse than CBO projected in July.
At least for now, good news reigns.
For one, CBO does not project a recession.
And while waning spending on the pandemic was always expected, the government also is seeing a larger-than-expected surge in revenue, accounting for $800 billion of the $1.8 trillion improvement in the deficit from last year to this year, CBO said. Its analysts are still searching for the full explanation.
“In 2022, revenues in CBO’s projections reach their highest level as a share of GDP in more than two decades. They then decline over the next few years but remain above their long-term average through 2032,” said Phillip L. Swagel, CBO’s director.
“But outlays grow faster than revenues over that period, so deficits increase,” he added.
The analysis suggests that the federal budget closely tracks what most Americans are experiencing in their own budgets: good news in rising wages, but the gains are more than eaten up by rising costs.
For the feds, the surging economy means more income. But the higher interest rates also mean higher costs for programs like Social Security, and higher debt payments.
By 2030, the government will spend $1 trillion a year on interest payments alone, or one-eighth of all federal spending. Right now it’s about half that rate.
Democrats celebrated the good news in the report.
Shalanda Young, the White House’s budget director, said the drop in the deficit from last year is the largest in history.
“This progress wasn’t automatic or inevitable. It’s because this administration has responsibly managed the pandemic, which allowed us to wind down emergency measures, combined with a significant increase in revenues stemming from an historically strong economic recovery,” she said.
But Rep. Jason Smith, the top Republican on the House Budget Committee, said Democrats shouldn’t pat themselves on the back too much. He called the report sobering, given the longer trend lines.
Indeed, he said the higher revenue this year is due to the 2017 tax cuts under President Trump, which he said disproved the dire warnings that the government would be strapped for cash by letting Americans keep more of it.
“Revenues are far outpacing what CBO predicted back when the tax relief was enacted into law,” the Missouri Republican said.
Michael A. Peterson, CEO of the budget watchdog Peter G. Peterson Foundation, also said the short-term gains aren’t anything to crow about.
“This year’s deficit is down in comparison to last year, but that is due primarily to the automatic expiration of pandemic relief programs, rather than any steps taken to stabilize our debt or deal with the growing structural imbalances between spending and revenues,” Mr. Peterson said.
As it stands now, lawmakers have set the government on a path to spend 23.2% of gross domestic product over the next decade. That’s well above the 20.8% average during the previous 50 years.
Revenue, meanwhile, will average 18.1% of GDP, which is also higher than the 50-year average.
The gap between that 18.1% revenue and 23.2% spending is what produces the $14.5 trillion in cumulative deficits.
Debt held by the public — the total accumulation of those deficits — will rise from $22.3 trillion at the end of fiscal 2021 to nearly $36 trillion at the end of this decade, and it will top $40 trillion in 2032.
As a percentage of GDP, debt will drop from 100% last year to 96% next year, before beginning a steady rise to 110% in 2032. That would be the highest level Uncle Sam has ever recorded, CBO said.