Federal budget deficit expected to soar to $2.6 trillion in 2034, CBO says

A major reason for the widening gap between revenue and spending: a spike in net interest payments on the federal debt due to higher interest rates. Net interest costs are initially similar to discretionary spending for both defense and nondefense activities, but by 2034, the costs are roughly 1.5 times larger than each, the CBO said.

Also contributing to the rise in deficits are the aging population and the growth in federal health care costs, which will necessitate greater spending on Social Security and Medicare.

Looking at the deficit as a share of the economy, the gaps over the next decade are about 50% larger than their historical average over the past five decades, the CBO noted.

The nation’s debt held by the public is expected to rise to a record 116% of the economy by 2034.

CBO’s deficit projection will likely add pressure to congressional lawmakers who have yet to agree on funding for federal agencies for fiscal year 2024. House GOP lawmakers are pushing to cut spending to narrow the deficit, but divisions on Capitol Hill have forced Congress to pass three short-term funding bills to avoid government shutdowns. The latest deal keeps federal agencies funded into early March.

The nation’s fiscal future also depends heavily on how Congress addresses the individual income tax provisions of the 2017 Tax Cuts and Jobs Act that expire at the end of 2025. The CBO’s projections assume the tax breaks will expire, which would bring in more revenue to the federal government, but lawmakers are expected to extend at least some of them.

Two bright notes in the report: The projected cumulative deficit over the 2024 to 2033 period is now 7%, or $1.4 trillion, smaller than the CBO projected last year because of estimated reductions in discretionary spending due to the debt ceiling deal Congress approved last year and the short-term funding bills. Also, the agency is expecting that economic growth will be stronger over the next decade, partly because more people will be working.

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