By Kate Davidson 

WASHINGTON -- Annual U.S. budget deficits are on track to more than double as a share of the economy, though not as much as previously thought, in a trend the Congressional Budget Office said is a significant risk for the nation.

Government outlays are projected to outpace federal revenues over the coming decades, due in large part to higher spending on Social Security and Medicare, and rising interest costs on government debt, said CBO, Congress's nonpartisan scorekeeper. As a result, federal deficits as a share of gross domestic product would rise from 4.2% in 2019, to 4.5% in 2029 and 8.7% in 2049, well above the 2.7% average over the past 50 years.

Those figures would be even higher if Congress votes to boost federal spending next year above caps enacted in 2011, or to extend tax cuts under the 2017 tax-law overhaul set to expire in 2025.

Rising deficits would push the government's overall debt load to 144% of GDP by 2049, from 78% projected this year, CBO said in its annual long-term budget report.

"The prospect of such large deficits over many years, and the high and rising debt that would result, poses substantial risks for the nation and presents policy makers with significant challenges," CBO Director Phillip Swagel said Tuesday.

Deficits have climbed following the 2017 tax cuts, which constrained federal revenue collection last year, and a two-year budget deal in 2018 that busted federal spending limits. Congressional leaders are negotiating a new deal to replace the current one, which expires Oct. 1, and are likely to maintain higher spending levels or even increase them.

High and rising debt would dampen economic output over the coming decades and could increase the risk of a fiscal crisis, CBO said. It may also constrain policy makers in the next economic downturn: Research has shown countries with higher debt-to-GDP ratios during a crisis have weaker recoveries, in part because policy makers worry about borrowing more to stimulate the economy.

CBO's latest long-term forecast is slightly improved from last year, thanks to lower projections for future interest rates, which would reduce the government's borrowing costs.

CBO expects yields on the 10-year U.S. Treasury note would increase from 2.9% at the end of 2018 to 3.8% in 2029 and 4.6% in 2049 -- a step down from its June 2018 forecast, when it saw rates rising to 4.8% by 2049.

Lower rates in the coming years would mean a smaller share of government spending devoted to servicing the federal debt. Debt payments, the fastest-growing portion of the federal budget, are expected to triple over the next 30 years, rising from 1.8% of GDP in 2019 to 5.7% in 2049, below last year's estimate of 6.3% in 2048.

The forecast changes follow a decline in government bond yields this spring that has confounded markets. More broadly, some mainstream economists are rethinking the dangers of deficits and debts in an environment of lower interest rates.

Low rates in the years since the 2008 crisis have held down government borrowing costs, though debt has soared. Economists have predicted that rising deficits coupled with an improving economy would push interest rates up again soon, making debt more expensive to service.

Instead, 10-year Treasury yields have fallen to around 2% from more than 5% in 2006.

CBO emphasized its forecasts are highly sensitive to changes in underlying economic factors, such as the pace of economic growth and the path of interest rates.

If federal borrowing rates were 1 percentage point lower each year than CBO projects, for example, debt held by the public would be 107% of GDP by 2049. If they were 1 percentage point higher, debt-to-GDP would total 199%. In either case, debt is on track to be much higher in 30 years than it is today, Mr. Swagel said.

"These clear projections should motivate our lawmakers to begin managing the debt immediately, and budgeting responsibly to help America meet its most pressing challenges," said Michael Peterson, chief executive of the Peter G. Peterson Foundation, which advocates for reducing deficits.

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

June 25, 2019 13:58 ET (17:58 GMT)

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