The CBO’s latest fiscal outlook shows U.S. federal debt remaining on an unsustainable path, with spending, entitlement growth, and interest costs rising faster than revenues. The source argues that the problem cannot realistically be solved by blaming CBO assumptions or relying on tax increases alone.
CBO’s Baseline Shows Debt Still Rising
The Congressional Budget Office provides annual projections of the federal government’s fiscal outlook, including revenues, deficits, interest rates, inflation, GDP, and other economic variables.
The latest CBO projection includes the effects of the One Big Beautiful Bill Act and the Trump administration’s higher tariffs as of November 2025, before the Supreme Court ruled many of the tariffs illegal.
Under the CBO baseline, publicly held federal debt is projected to reach a new record of 106% of GDP within four years. It is then projected to rise further:
- 120% of GDP by 2036
- 175% of GDP by 2056
Federal deficits are projected to rise from 5.8% of GDP this year to:
- 6.7% of GDP in 2036
- 9.1% of GDP in 2056
The source describes these as the largest sustained deficits in U.S. history.
A comparison with earlier CBO projections shows that the broad trends in debt, deficits, tax revenues, and spending remain largely intact despite recent fiscal policy changes.
Why the Long-Term Outlook Has Worsened
According to the CBO, the public debt outlook over the next decade has modestly improved, but the long-term outlook has worsened.
The main factors include:
- Faster economic growth, mainly from OBBBA reforms and productivity gains related to artificial intelligence
- Investment and productivity gains from AI-related innovation
- Offsets from higher tariffs and lower immigration
- Higher net deficits due to lower income taxes, partly offset by lower spending and higher tariffs
- Higher interest rates linked partly to higher deficits and faster economic growth
- Higher debt servicing costs
Spending Is Growing Faster Than Revenues
Federal spending and revenues are both projected to remain above historical averages and grow faster than GDP, but spending is higher and growing faster.
Federal spending is projected at 23.3% of GDP this year, compared with a 50-year average of 21.1%. It is projected to rise to:
- 24.4% of GDP in 2036
- 27.9% of GDP in 2056
Federal revenues are projected at 17.5% of GDP this year, slightly above the 50-year average of 17.3%. Revenues are projected to rise to:
- 17.8% of GDP in 2036
- 18.8% of GDP in 2056
Revenue growth is expected partly because of bracket creep, as incomes grow faster than the inflation measure used to index federal tax brackets.
Entitlements and Interest Costs Drive the Pressure
The major entitlement programs are the core drivers of higher federal spending.
Social Security, Medicare, and other major health care programs have grown faster than the economy for decades and now make up almost half of the federal budget. Social Security and Medicare are projected to continue growing faster than the economy, exceeding 10% of GDP together within the next decade.
The only major spending category growing faster than major entitlement programs is net interest on the debt.
Net interest is now at a record high of 3.3% of GDP and is projected to reach 6.9% of GDP in 30 years. At that point, it would represent about one-quarter of the federal budget.
The source argues that entitlement and interest spending are crowding out other federal spending, including defense and nondefense discretionary programs.
Limits of Solving the Debt Problem With Tax Increases
The source argues that solving the debt problem through tax increases alone is difficult.
The primary deficit, meaning the gap between non-interest spending and revenues, exceeds 2% of GDP and is projected to grow over the long term.
Tax Foundation modeling cited in the source suggests that tax increases often proposed by politicians, such as taxing high-income households or raising tariffs, tend to target narrow groups and produce less sustainable revenue over time.
The source says these measures can raise substantial revenue in the short term, but economic distortions, avoidance, and incentive effects reduce the long-term revenue gains.
Broad-Based Taxes Perform Better but Still Fall Short
The source identifies broad-based taxes, especially a value-added tax, as more efficient revenue raisers.
However, even a broad-based 5% VAT would not put federal debt on a sustainable course. The source describes such a VAT as an enormous tax increase, larger than any since World War II, but says it would mainly delay dangerous debt levels by several years rather than solve the fiscal problem.
The source also notes that broader tax reform could increase economic growth, simplification, and neutrality, especially if inefficient tax code features were removed. But it argues that even fundamental tax reform should not be viewed as a complete solution to the federal debt problem.
The source says the central solution must involve spending reforms, especially to Social Security and Medicare, because these programs are growing faster than GDP and driving debt higher.
AI Growth Is Not Enough to Solve the Debt Problem
The CBO’s latest outlook discusses artificial intelligence as a factor affecting investment, productivity, economic growth, and interest rates.
The source notes that the CBO recognizes uncertainty around AI’s economic and budget effects. However, it argues that plausible AI-driven growth would not eliminate the debt problem.
Using a CBO “rules-of-thumb” tool, the source says that even if AI boosts productivity growth twice as much as the CBO assumes, raising it by 0.1 percentage points per year over the next decade, debt would only fall slightly relative to the baseline.
Under that optimistic scenario, publicly held debt would still rise to:
- 107% of GDP in 2030, instead of 107.7%
- 118% of GDP in 2036, instead of 120.2%
The improvement would come from faster economic growth increasing revenues, partly offset by higher interest costs and higher entitlement spending, since Social Security benefits are tied to wage growth and indirectly to productivity.
Higher Interest Rates Could Make the Outlook Worse
The source also considers a pessimistic scenario where interest rates rise above the CBO baseline, possibly because of higher inflation or greater perceived risk in holding Treasury debt.
If interest rates are 0.4 percentage points higher over the next decade than the CBO forecasts, publicly held debt would rise faster, reaching:
- 108.8% of GDP in 2030
- 123.5% of GDP in 2036
The source says this illustrates how sensitive the budget outlook is to debt servicing costs.
Main Fiscal Takeaway
The source argues that CBO projections should be treated as a warning rather than blamed for the underlying fiscal problem.
The central issue is that federal spending, especially on Social Security, Medicare, major health programs, and interest payments, is growing faster than the economy and faster than revenues.
Tax increases may raise revenue, and broad-based tax reform may improve efficiency, but neither is presented as sufficient on its own. The source concludes that long-term fiscal sustainability depends primarily on controlling spending growth, especially in the major entitlement programs.
Source article: taxfoundation.org
