As the Congressional Budget Office releases its latest fiscal update, the numbers are beyond alarming. The projected deficit for this fiscal year is expected to reach a staggering 7 percent of Gross Domestic Product, while the federal debt is predicted to soar past $50 trillion by late 2034.
What’s even more concerning is that in 2034, the government is on course to spend over 40 percent of all individual income taxes solely on interest payments on the massive debt, and this is without extending the 2017 Tax Cuts and Jobs Act (TCJA).
The upcoming year will force Congress and the President to grapple with these daunting figures in two crucial ways. Initially, they must tackle the federal government’s ability to finance the burgeoning debt as the borrowing authority lapses on January 1, 2025. Additionally, they must address the expiration of the TCJA’s individual tax provisions at the end of the following year.
Extending these individual tax cuts and certain corporate provisions, according to recent CBO estimates, could result in a revenue decrease of approximately $4 trillion over the next decade and could inflate interest costs by about $600 billion. By 2034, more than half of all federal individual income taxes may be required to service the ballooning debt.
With the November elections looming, it would be premature to speculate on the outcomes. However, regardless of who emerges victorious, the substantial deficits are likely to complicate what promises to be a strenuous 2025 fiscal debate.
The first challenge on the horizon is the looming debt limit deadline. With Congress not in session on New Year’s Day, a brief extension, possibly until March, could be enacted this year. If Democrats are in control, they might opt to abolish the debt limit entirely. Yet, under Republican governance or a divided government, uncertainty looms.
Looking ahead, the fate of the TCJA remains uncertain. If Democrats prevail, expect a tax bill reflecting Biden’s pledge to increase taxes on corporations and high-income households while sparing households earning $400,000 or less from tax hikes.
Conversely, a GOP-led government may pave a more erratic path. Trump’s tenure saw a federal deficit less than 3.5 percent of GDP initially, but subsequent legislation, including the TCJA, drastically inflated deficits. The impact of the pandemic further exacerbated fiscal concerns.
As Trump hints at not only making the TCJA permanent but also reducing corporate tax rates, Republicans are divided. Some may support tax hikes on corporations, while others favor cutting tax rates. Following a list of exemptions, there is limited room for spending cuts.
With bipartisan support to extend most of the TCJA, lawmakers are anticipated to add to the nation’s sizable debt in the foreseeable future. Whether CBO’s disconcerting budget projections will restrain their tax cuts remains uncertain.
