Candice Horbacz
The Congressional Budget Office (CBO) consistently provides annual snapshots of the federal government’s fiscal outlook, reports that have, in recent years, depicted a trajectory from concerning to outright alarming. While one might quibble with specific CBO assumptions, such as the precise long-term impact of artificial intelligence (AI) on productivity or the exact path of future interest rates, its analyses remain the most comprehensive, rigorous, and up-to-date assessments available regarding the likely course of the U.S. economy under current law and the primary factors fueling the nation’s escalating debt. These baseline projections—encompassing revenues, deficits, interest rates, inflation, Gross Domestic Product (GDP), and other critical economic variables—serve as indispensable inputs for organizations like the Tax Foundation, grounding their modeling of potential tax policy changes in the most widely accepted understanding of the economy’s default path and the federal budget under existing legislation. In essence, the CBO baseline establishes a vital reference point, enabling a clear measurement of the economic and fiscal impacts of various proposed tax adjustments.
The Unfolding Fiscal Crisis: CBO’s Dire Projections
The CBO’s most recent projection, which integrates the effects of recent legislative actions, including the now-defunct "One Big Beautiful Bill Act (OBBBA)" and the Trump administration’s elevated tariffs (as assessed in November 2025, prior to a Supreme Court ruling that deemed many of the tariffs illegal), unequivocally indicates that the federal debt remains on an unsustainable course. The data paints a stark picture: publicly held debt is projected to surge to an unprecedented 106 percent of GDP within the next four years. This trajectory continues its upward climb, reaching 120 percent by 2036 and a staggering 175 percent by 2056. To put this in historical context, the highest debt-to-GDP ratio recorded since World War II was approximately 106% in 2020, driven by the unprecedented spending during the COVID-19 pandemic. The CBO’s projections suggest that this level will not only be matched but sustained and significantly exceeded in the coming decades, far surpassing any peacetime historical averages.
Accompanying this debt explosion is a persistent and growing deficit. Deficits are projected to expand from 5.8 percent of GDP this year to 6.7 percent in 2036 and an alarming 9.1 percent in 2056. These figures represent the largest sustained deficits in the nation’s history, signaling a deep structural imbalance between federal spending and revenue. For perspective, the average annual deficit over the last 50 years has been closer to 3 percent of GDP. Sustained deficits of this magnitude have profound implications for economic stability, potentially leading to higher interest rates, reduced private investment, and increased risk of fiscal crises.
A Chronology of Deterioration: Shifting Fiscal Landscapes
A comparative analysis of the CBO’s projections from earlier this year against those from early last year reveals a consistent underlying trend: despite significant shifts in fiscal policy implemented by the current administration, the major trajectories for debt, deficits, tax revenues, and spending have largely remained intact. This indicates that while specific policies may offer short-term adjustments or temporary reprieves, they have not fundamentally altered the long-term, unsustainable path.
Initially, the outlook for publicly held debt as a share of GDP over the immediate decade showed a modest improvement in some CBO reports. However, this short-term amelioration has been overshadowed by a significant worsening of the long-run outlook. This deterioration is attributable to a complex interplay of factors, including:
- Demographic Shifts: The ongoing aging of the U.S. population continues to place immense pressure on entitlement programs like Social Security and Medicare, increasing outlays for benefits and healthcare.
- Rising Healthcare Costs: Healthcare expenditures consistently grow faster than the overall economy, further exacerbating the financial strain on federal health programs.
- Higher Interest Rate Projections: The CBO has adjusted its interest rate forecasts upwards in recent years, reflecting persistent inflation and tighter monetary policy, which directly translates into higher costs for servicing the national debt.
- Lower Productivity Growth Assumptions: While AI offers potential, the CBO often maintains conservative assumptions for long-term productivity growth, which directly impacts projections for economic expansion and, consequently, federal revenue.
- Persistent Structural Deficits: The fundamental mismatch between current federal spending commitments and revenue generation persists, regardless of short-term economic fluctuations or minor policy tweaks.
The Engines of Growth: Spending and Revenue Dynamics
Both federal spending and revenues are currently above their historical averages and are growing faster than GDP. Crucially, however, spending is not only at a higher absolute level but is also accelerating at a more rapid pace. Federal spending is projected to hit 23.3 percent of GDP this year, a figure notably higher than the 50-year average of 21.1 percent. This upward trend is expected to continue, reaching 24.4 percent in 2036 and a substantial 27.9 percent by 2056.
Revenues, while also growing, lag behind spending. They are projected to reach 17.5 percent of GDP this year, slightly exceeding the 50-year historical average of 17.3 percent. By 2036, revenues are expected to rise to 17.8 percent, and to 18.8 percent by 2056. The primary reason revenues grow faster than GDP is "bracket creep." This phenomenon occurs when inflation, or simply rising nominal incomes, pushes taxpayers into higher income tax brackets, or reduces the real value of tax deductions and credits, even if their real purchasing power has not significantly increased. The inflation measure used to index federal tax brackets often lags behind actual income growth, effectively increasing the real tax burden over time.
Entitlements and Interest: The Dominant Drivers
The core drivers of these elevated spending levels are the major entitlement programs, primarily Social Security, Medicare, and other significant health care initiatives. Having grown faster than the economy for decades, these programs now consume almost half of the entire federal budget. Social Security and Medicare are projected to continue their rapid expansion, collectively exceeding 10 percent of GDP within the next decade. This growth is driven relentlessly by two demographic and economic forces: the ongoing aging of the population, which increases the number of beneficiaries, and the persistent escalation of healthcare costs.
However, the only major category of spending growing even faster than these entitlement programs is net interest on the national debt. This cost has reached an unprecedented 3.3 percent of GDP this year and is on an trajectory to hit 6.9 percent in 30 years, at which point it will consume a staggering quarter of the federal budget. This burgeoning interest expense represents a direct drain on taxpayer funds, diverting resources that could otherwise be allocated to defense, infrastructure, education, or other critical public services. This phenomenon, often referred to as "crowding out," not only puts upward pressure on deficits and debt but also constrains the government’s ability to respond to future crises or invest in long-term economic growth.
What Can Tax Policy Realistically Achieve?
Addressing the national debt crisis solely through tax increases presents formidable challenges. The primary deficit—the gap between non-interest spending and revenues—exceeds 2 percent of GDP and is projected to grow further in the long run. Closing this gap is fundamental to achieving debt sustainability.
Research conducted by the Tax Foundation, utilizing their economic model updated with the latest CBO baseline, demonstrates the limitations and trade-offs inherent in various tax policy options. The study reveals that tax increases most frequently championed by politicians, such as raising taxes on high-income earners or implementing higher tariffs, tend to target a narrow subset of taxpayers. While these measures can generate substantial revenue in the short term, their long-term effectiveness is often undermined by economic distortions and taxpayer avoidance behaviors. As individuals and businesses adjust their activities to mitigate the impact of higher taxes, the expected revenue gains diminish over time, leaving significant fiscal gaps in the long run and failing to fundamentally alter the unsustainable debt trajectory. For instance, high marginal tax rates can discourage work, saving, and investment, while tariffs can lead to higher consumer prices and retaliatory measures from trading partners, ultimately harming economic growth.
In contrast, more efficient, broad-based revenue generators, most notably a value-added tax (VAT), demonstrate better performance. A VAT, which is common in most developed economies, taxes consumption at each stage of production and distribution. The Tax Foundation’s modeling illustrates that even a 5 percent VAT on a broad base—an enormous tax hike far exceeding any implemented since World War II—would not be sufficient to put the national debt on a sustainable course. Instead, such a significant VAT would merely delay the onset of more dangerous debt levels projected under the CBO’s baseline by several years. This finding underscores the sheer magnitude of the fiscal challenge and the inadequacy of even historically large tax increases as a standalone solution.
The study, while not exhaustive of every conceivable tax policy scenario, provides crucial guideposts regarding the revenue potential of different types of tax increases and the inherent trade-offs, including reduced economic growth. For example, the VAT option offers insight into the potential if the U.S. tax system were to shift towards more efficient, broad-based approaches. A more comprehensive overhaul in this direction, which would also involve the removal of the tax code’s least efficient features, could substantially boost economic growth even at higher revenue levels. Previous model simulations by the Tax Foundation on fundamental reforms, such as replacing the income tax with a consumption tax, have demonstrated this potential for enhanced growth, simplification, and neutrality.
However, even the most beneficial fundamental tax reform, while stimulating economic growth, simplifying the tax system, and promoting neutrality, should not be viewed as the sole solution to the debt problem. The fundamental solution must primarily involve significant spending reforms, particularly within the major entitlement programs—Social Security and Medicare—which are growing faster than GDP and are the primary drivers of the escalating national debt.
External Factors and Uncertainties: The AI Question and Interest Rate Volatility
The CBO’s most recent outlook dedicates considerable attention to artificial intelligence, mentioning it 15 times and acknowledging its potential contribution to investment, productivity, and overall economic growth, as well as its potential to influence interest rates. The CBO is careful to recognize the profound uncertainty surrounding AI’s ultimate effects on the economy and the federal budget. Crucially, however, the range of plausible outcomes does not include a scenario where AI miraculously eliminates the national debt or puts it on a sustainable course without significant policy changes.
To illustrate this, the CBO provides a "rules-of-thumb" tool for estimating how changes in key underlying economic variables affect the budget. Based on this tool, even if AI were to boost productivity growth twice as much as the CBO currently assumes—pushing it 0.1 percentage points higher each year over the next decade—the impact on debt reduction would be marginal. Publicly held debt as a share of GDP would still rise to a record 107 percent (compared to 107.7 percent in the baseline) by 2030 and 118 percent (compared to 120.2 percent in the baseline) by 2036. This modest reduction would stem from faster economic growth boosting revenues, partially offset by higher interest costs on the larger debt and increased spending on entitlements (as Social Security benefits are indirectly tied to growth in wages and, by extension, productivity). This analysis dampens any overly optimistic expectations that technological advancements alone will solve the fiscal predicament.
Conversely, a plausible pessimistic scenario involves interest rates climbing above the CBO’s baseline projection. This could occur due to increased inflation, a sustained period of tight monetary policy, or a perceived increase in the risk associated with holding U.S. Treasury debt. Such a development would have a significant and immediate impact on the budget through higher debt servicing costs. For example, if interest rates were 0.4 percentage points higher over the next decade than the CBO forecasts (roughly double the increase observed since the CBO’s forecast in early 2025), publicly held debt would rise even faster. Under this scenario, it would reach 108.8 percent of GDP by 2030 and 123.5 percent by 2036, further exacerbating the fiscal challenges.
The likelihood of these various scenarios is, of course, highly uncertain. Nevertheless, these examples provide a crucial sense of the range of possibilities and the sensitivity of the fiscal outlook to key economic variables. Even the most optimistic scenario of an AI-driven economic boom, much like fundamental tax reform, merely buys a bit of time, shifting out by a few years the inevitable fiscal reckoning.
Broader Implications and the Path Forward
The CBO’s regular updates on the fiscal outlook serve as a powerful and persistent reminder of the central importance of getting federal spending growth under control, particularly the rapid expansion of the major entitlement programs. The implications of unchecked debt growth are profound, threatening long-term economic stability. A persistently high and rising national debt can lead to several adverse outcomes: it can increase the risk of a fiscal crisis, make it harder for the government to respond to future economic downturns or national emergencies, put upward pressure on interest rates, and reduce national saving and investment, ultimately slowing economic growth. It also raises questions of intergenerational equity, as future generations will bear the burden of today’s spending.
Economists from across the political spectrum generally agree on the urgency of addressing the national debt, even if they differ on the specific remedies. While some advocate primarily for revenue increases, others emphasize spending cuts. The CBO’s analysis, and the Tax Foundation’s modeling, strongly suggest that a comprehensive solution must involve a combination of strategies, with a primary focus on reforming entitlement programs. Without addressing the structural growth in Social Security and Medicare, any other fiscal adjustments, whether through tax increases or cuts to discretionary spending, will likely be insufficient to achieve long-term sustainability. The political will to enact such reforms remains the greatest hurdle, but the CBO’s projections underscore the ever-increasing cost of inaction.
