As Congress engages in a fervent debate over federal agencies' spending plans for the upcoming fiscal year, concerns about a potential government shutdown loom large. This would mark the fourth time in the past decade that such an event has occurred.
Despite the intensity of the political conflict, it is worth noting that the amounts under discussion represent only a small fraction of the government's overall budget. Regardless of the compromise reached, the nation's rising debt deficit is unlikely to see a significant change.
A significant portion of the budget dispute revolves around nondefense discretionary spending, which accounted for approximately $910 billion in 2022 and constituted roughly 15% of the total federal budget, according to the Congressional Budget Office. Our analysis of the CBO's data earlier this year confirms that, despite the current impasse in Congress, these figures remain accurate.
Back in May, President Joe Biden and House Speaker Kevin McCarthy reached an agreement to keep the group's 2024 outlays at roughly the same level as those in 2022. This decision was part of a deal aimed at suspending the debt ceiling until 2025 to prevent a federal default.
Although some Republicans have called for further cuts, it is important to note that these proposed reductions are relatively modest—amounting to approximately $100 billion, according to The Washington Post. This figure represents less than 2% of the government's total spending, which stood at $6.3 trillion in fiscal year 2022.
In light of current projections from the Congressional Budget Office, the nation's debt has already reached a staggering $33 trillion, with an additional $19 trillion expected to accumulate over the next decade. However, if Congress were to pass a $100 billion budget cut each year for the next 10 years, it would result in a reduction of $1 trillion in the deficit.
Our examination of the CBO's 10-year projection of the U.S. budget and economy has yielded five comprehensive charts to shed light on the current debt situation.
Over the next decade, the federal government is projected to accumulate $65 trillion in revenue. More than half of this amount will be derived from individual income taxes, while approximately one-third will come from payroll taxes.
Unfortunately, the country is set to continue spending more than it collects. Rising interest payments, substantial federal stimulus bills, and the mounting costs associated with Social Security and Medicare benefits for retiring baby boomers are among the government's largest expenditure items.
The Department of Health and Human Services: America's Biggest Spender
The Department of Health and Human Services (HHS) stands as the leading federal agency in terms of projected expenditure for the next decade. Trailing behind are the Social Security Administration and the Treasury Department.
In 2023 alone, the Congressional Budget Office (CBO) estimates a considerable $1.4 trillion deficit between government spending and tax revenue. Over the next ten years, this annual deficit is predicted to escalate, peaking at $2.7 trillion in 2033.
Shocking statistics reveal that the projected deficit for 2033 would amount to 6.9% of the gross domestic product—the highest level recorded since 1946, except for five exceptional instances. Adding to this worry, cumulative public debt is expected to reach 118% of GDP by 2033, marking an all-time high.
Public debt encompasses all federal debt held by various entities outside the U.S. government, excluding Federal Financing Bank securities. This includes individuals, corporations, state or local governments, and foreign governments.
Jim Reid, head of global fundamental credit strategy at Deutsche Bank, believes that these projections might be too optimistic. He highlights that they are based on assumptions of consistent economic growth and a 10-year Treasury yield remaining relatively stable around 3.8%. Reid cites the example of 2009 projections, which greatly underestimated the actual debt as a percentage of GDP for 2023.
Considering the soaring public debt combined with rising interest rates over the past year and a half, the government will inevitably have to allocate more funds to interest payments in the coming decade. Net interest on public debt is projected to account for 14% of the federal government's total spending by 2033.
According to Reid, the last time net interest had such a significant share of federal spending was in the mid-to-late 1980s. During that time, Washington began prioritizing deficit reduction, but the process was gradual and spanned several years.