The Congressional Budget Office (CBO) released projections on Tuesday, highlighting a dire fiscal forecast as the United States faces significant legislative battles over taxes and spending. The national debt is set to exceed $56 trillion by 2034, driven by escalating spending and interest costs outpacing revenue growth.
Key factors contributing to this surge include the growing financial demands of Social Security and Medicare, along with rising interest rates that increase the cost of federal borrowing. The CBO predicts that the budget deficit for 2024 will reach $1.9 trillion, up from an earlier estimate of $1.6 trillion, and will further expand to $2.9 trillion annually by 2034. By that year, debt held by the public is expected to hit 122 percent of the gross domestic product (GDP), a significant rise from 99 percent in 2024.
These projections emerge as lawmakers prepare for intense debates over tax and spending policies. The 2017 tax cuts are set to expire in 2025, prompting decisions on potential renewals and funding mechanisms. Additionally, the statutory cap on federal borrowing, suspended last year, will need to be addressed again by January.
The fiscal outlook is further complicated by an aging population, which strains retirement and medical benefit programs. Both major political parties have voiced concerns about the national debt amid rising inflation and interest rates, but curbing spending has proven challenging.
While the CBO’s report assumes the 2017 tax cuts will not be extended, this scenario is unlikely. President Biden has pledged to extend cuts for low- and middle-income earners, and former President Trump has promised to extend all cuts if he wins the upcoming election. Extending these tax cuts could add approximately $5 trillion to the national debt over the next decade.
Several factors are driving the higher projected deficits, including the Biden administration’s decision to cancel over $100 billion in student loan debt, increased aid packages for Ukraine and Israel, and higher-than-anticipated Medicaid expenses. Additionally, a recent bipartisan agreement to reduce IRS funding by $20 billion is expected to decrease tax revenue by $32 billion through 2034, as it hampers efforts to combat tax evasion.
The burden of managing the national debt is exacerbated by high interest rates. The CBO forecasts annual interest costs will escalate to $1.7 trillion by 2034, nearly doubling from $892 billion this year. By then, interest payments will rival the expenditure on Medicare.
“The harmful effects of higher interest rates fueling higher interest costs on a huge existing debt load are continuing, and leading to additional borrowing,” said Michael Peterson, CEO of the Peter G. Peterson Foundation. “It’s the definition of unsustainable.”
However, one positive economic shift has emerged: increased immigration is projected to help reduce deficits over time. The CBO expects an influx of about 8.7 million more immigrants from 2021 to 2026 compared to historical trends. These new workers are anticipated to contribute nearly $1 trillion more in taxes than they will consume in government benefits, adding $1.2 trillion in federal revenues over the decade while utilizing about $300 billion in federal benefits, mainly for health insurance subsidies.
As the U.S. braces for these fiscal challenges, the coming years will require careful navigation of tax policies, spending priorities, and debt management to ensure economic stability and sustainability.