It is not good idea to budget as if you are going to win the lottery

Government data indicates within the next decade the federal government may be spending more on entitlement programs and interest  than it receives in revenue. It couldn't spend money on anything else and balance the budget. Within the next 10-25 years simply the interest on the debt may be more than revenue. The budget couldn't be balanced even in theory which means the country would have effectively gone bankrupt   before that. 

Politicians didn't learn enough from the financial crisis. Many people  lost houses when they couldn't afford rising mortgage costs. Often they  overestimated their future earnings and underestimated expenses. Its understandable to dream about what could be done with a higher income, but its best to use conservative estimates when planning budgets.  Federal agencies aren't doing a good   job of  considering the possibility of lower income and higher expenses

Last year the Federal Reserve published a study "How Good Are the Government’s Deficit and Debt Projections and Should We Care?" which looked at the track record of the  Congressional Budget Office projections from the last few decades. They compared them with "random walk" (RW) projections, i.e. just random guessing, and found  that

"the CBO’s cumulative 5-year projections are considerably worse than projections from the RW model; [...]the deficit projections beyond a year were unreliable. Importantly, we found that the projections were biased in the direction of underprojecting the size of the deficit or overprojecting the size of the surplus."

Since the government tends to be overoptimistic, it is useful to look to consider more conservative projections. People in business often plan by exploring best, expected and worst case scenarios because they know the future is hard to accurately predict.   The Social Security Administration (SSA) at least claims to do that, but government-wide forecasts haven't taken that approachThis page considers some alternative scenarios by combining forecasts from different government agencies, and includes an interactive graph where you can explore future US finances using different forecasts of the future. Unfortunately  e.g.  the SSA's  projections have enough  flaws that its unclear  whether we have a realistic estimate for how much future entitlements will cost so these forecasts may still be optimistic. 

The Congressional Budget Office released a Long Term Budget Outlook  in June 2012 where they produced this graph of potential future debt vs. GDP (Gross Domestic Product, a $ measure of how much our economy produces):

Neither one is meant to be a worst case scenario, e.g. they both use the same forecast for future GDP despite acknowledging they don't consider the possibility that high government debt levels may slow the economy. The difference is  the unrealistic baseline scenario   assumes  laws aren't changed, e.g. that the "sequester" politicians wish to rollback remains. The "alternative" scenario assumes laws are updated to continue current policies. In the baseline scenario  e.g.   expiring policies they always renew are assumed to disappear, which is how it manages to show debt eventually decreasing. Its  like doing a personal budget pretending  when your car lease expires you won't  have one, even though its not realistic since no bus runs close to your workplace 50 miles away. The "Alternative Fiscal Scenario" is based on current policies continuing. It assumes they will change laws to keep  promises they have made and renew  programs they've always kept.

For the past few decades federal revenue as a % of GDP  has only fluctuated within a small range regardless of tax rates. The unrealistic baseline scenario assumes it will somehow magically manage  to bring in more revenue than government has been able to collect in the past. The federal GAO (Government Accounting Office) responded in December 2012 with its own version of those scenarios where it at least caps   baseline revenue at "21.4 percent of GDP", while the more realistic "alternative simulation" assumes revenue peaks at its "40-year historical average of 17.9 percent of GDP". Now both scenarios show debt  increasing:

Both scenarios use the same GDP forecast, which is close to the one CBO uses and to the "intermediate cost" SSA forecast, which this site pointed out are likely overoptimistic  (also see here) to begin with (even aside from the need to consider we have poor luck and things are worse). The annual 2012 Social Security Board of Trustees Report has a lower GDP estimate it uses in its "high cost" scenario, though they  also acknowledge they don't take into account the potential for high debt to reduce GDP growth so it may still be too optimistic . The GAO provides spreadsheets of their data, so PoliticsDebunked updated it  to base its revenue  on  the lower SSA GDP forecast, added in the higher SSA interest rate estimate, added in estimates of the higher cost medicare scenario the SSA provides (surprisingly despite having a "high cost" scenario, there turned out to be no real forecast of higher Social Security costs  to add) and caps the revenue at the realistic 17.9% rate for both scenarios (see appendix for details&spreadsheet). Here are the adjusted GAO scenarios vs. the originals:
In the real world    the   eventual debt levels aren't possible (even for the original GAO current policy estimate) because well before then interest costs alone would exceed revenue. This is interest cost as a % of projected revenue:

When it hits 100% then all revenue goes to merely paying interest. That is also optimistic because the interest rate forecast doesn't vary with higher debt levels. In reality well before interest payments were at  100% of revenue the interest rate would increase because the country would be considered a bad risk, and it would more quickly reach the point where it couldn't pay  interest.  Any scenario where  GDP continues to grow after the government has gone bankrupt is obviously too optimistic. A shorter term concern is the point when spending just on entitlements (social security, medicare, medicaid, etc) and interest combined will exceed revenue, leaving no room to balance the budget with any other spending unless changes are made:


This is again being optimistic because  interest rates would climb if the US were close to that point. Even if debt weren't an issue now,   within a couple of decades entitlements by themselves could be more than revenue. Government wouldn't be able to cover their costs without borrowing(let alone pay for anything else) and couldn't afford any interest payments to borrow to do so:

Inflation would likely makes things worse

  Some people are  concerned the government might push for inflation in the future.  Although inflation might be possible for other reasons, it is unlikely the government  will try to "inflate away" the debt since while a deficit exists because  it won't do much good. One t clue the public should have   is that   future projections are mostly done using constant dollars, i.e. adjusted for inflation, so a different inflation rate doesn't change most of the numbers. The major exception is that interest payments are made based on the nominal interest rate which would rise.  

If the budget were balanced, then inflation would be more of a consideration,  but even the original GAO scenarios project a deficit every year. If you  owed $1000 and   paid off the interest on it each year  the principal you owe would remain at $1000 in nominal $. Inflation would reduce the real (inflation adjusted) value of that $1000 each year. In contrast if you borrowed   money each year   to cover the interest payment  then the real value of your debt would keep rising (as long as the real interest rate is positive), compounding at the real interest rate.

If inflation rates are expected to rise,  interest rates should be expected to rise even more to compensate (there tend to be only very rare brief "surprise" periods where rates are negative until investors catch on). As long as the budget isn't balanced, any increase in  interest rates would require the government to borrow money to cover the extra interest payment cost. Since interest rates would have risen at least as much as inflation, the extra borrowing would   more than offset any  reduction in the debt from the increased inflation. Higher nominal interest rates would more quickly lead to the point where interest payments and other spending are more than revenue.


If you lock in a low interest rate on a long term loan before inflation rises then you do see a benefit since your interest payments on that don't rise.  If the government had borrowed all its debt at a low fixed rate for a long time period it would then inflation would help.  For instance if it borrowed money for  30 years at 2%, then an inflation rate above that would reduce  the real value of that part of the debt.


In reality it  wouldn't receive  much of a benefit since most of the money it has borrowed is fairly short term debt it constantly rolls over by borrowing more money to pay off the old debt. They use that tactic mostly since  short term interest rates tend to be lower than long term rates.
The US Treasury's Office of Debt Management report for Q4 2012
shows   26.3% of federal debt has a term of less than  a year, 39% less than  2 years, 49.1% less than 3 years, and 66.2% less than 5 years. They plan to increase the average term length for their debt to take advantage of current lower rates, but not by much.

Although they don't state this, it seems natural to expect investors would become more concerned the government was expecting higher inflation in the future if they tried to increase the average maturity  too  much (or that they expected future higher rates due to US finances getting worse). Investors would demand higher long term rates to protect against that.
  The government would have to  surprise investors by hyperinflating at an increasing rate to get much benefit. It wouldn't be a surprise for long and investors might raise rates even faster in anticipation in a damaging spiral. That level of volatility would likely reduce GDP growth which would lead to even more borrowing.

Although they might get a little benefit from some surprise inflation on some of their eexisting debt, there is a good chance the higher rates on future borrowing (or re-borrowing when the short term debt rolls over) would cost it more in the long run.  Once investors discovered the government were intentionally trying to inflate away its debt they would likely punish it by demanding an even higher rate for any future borrowing out of fear the US was now a poor credit risk if it was intentionally engaging in such tactics.

For planning purposes it makes sense to not expect a hyperinflationary spiral, but to at least consider using the higher inflation rate the SSA uses in its "high cost" scenario. For rough estimating purposes to be conservative the figures on this page ignore any minor "surprise inflation" benefit the government might pull off. It assumes the real interest rate forecast doesn't change,  the only change in the forecast is inflation increasing the nominal interest rate and hence the interest payments :


All of these figures are assuming the economy continues to grow according as forecasts project. Although   it is likely to continue to grow (short term at least), there is no way to be certain exactly how much since no forecast is guaranteed. The government's approach  is   like personal budgeting betting on getting a raise. There may  trouble if it doesn't happen so its safest to budget as if you won't get one and then put the surplus to good use if you do. If in addition to using the higher SSA inflation rate, GDP were to stay flat the next several years the point where interest by itself is more than revenue is reached far earlier.


In that case interest+entitlements are more than revenue by 2015. Although flat GDP may be unlikely in the near term, studies show that as government debt grows, economic growth slows, although there is controversy over how much. Government borrowing  from the public  crowds out private borrowing needed for growing businesses.

A Stanford economics professor attempted to quantify the potential impact of future debt on US GDP growth using the results of the CBO long term budget outlook, the  IMF paper and this one by Reinhart,Reinhart and Rogoff.. His analysis is incomplete since it ignores  feedback effects in the IMF scenario. As GDP growth slows the government will have less revenue and so debt will grow  faster, which slows GDP growth even further. The graph below uses the original GAO estimate and current policy assumptions, it would be even worse using the alternative scenarios explored on this page.  It shows    future projections for GDP   vs. the potential reduction using the methodology from the IMF paper and the Reinhart paper (the CBO document doesn't provide enough information to adapt it its approach to impact on GDP):
That is  overoptimistic again because interest payments would have exceeded revenue in 2038 under the Reinhart scenario and in 2039 under the IMF scenario so the GDP would likely fall even earlier and faster. It also doesn't take into account interest rates rising due to high debt levels.

Higher growth rates bring a small negative side effect

This page is focused on consideration of conservative estimates. However it is worth noting that in the unlikely case the growth rate exceeds estimates, obviously that would help but it might bring one minor negative side effect.  For the last few decades the interest rate has been higher than the GDP growth rate in the US. An  IMF publication observes that: "The interest rate-growth differential (IRGD) shows a marked correlation with GDP per capita. It has been on average around one percentage point for large advanced economies during 1999–2008;". A higher growth rate may lead to  higher interest rates and interest payments. The growth rate will make it easier to eventually balance the budget if they choose to. If the budget is in surplus and no money needs to be borrowed to cover the interest payment, then growth will reduce the debt to  ratio over time. If the budget isn't balanced however and  money has to be borrowed to pay the increased interest payment, then  the debt/GDP ratio will continue to rise even if growth speeds up.

Interest Rates

The US Treasury gives the average interest rates on US Treasury Securities for 2001 onwards. It turns out they are fairly close to the interest rates the Social Security administration reports over the same time. That is why it made sense to plug in  the higher interest rates in an  SSA scenario as alternative future interest rates on the national debt.  There papers which give varying estimates for how interest rates might change with increasing debt levels. Rather than posting static graphs of the various possibilities,the interest rate is one of the options that can be varied in the interactive graph below.

Interactive Graph.

Currently government estimates are given as static graphs and data tables. They could additionally be given as interactive "what if" tools like the graph below which would allow lawmakers, policy analysts and concerned members of the public to  explore different options themselves. Some options may be a little technical for some readers who can just skim over this section. Whenever lawmakers or regulators propose making changes they should provide such tools to allow their proposals to be compared to current estimates. 

The interactive graph   below lets you view a variety of information based on different scenarios.  The graph is set initially to show interest+entitlement spending as a % of revenue. The initial scenario 1 settings correspond to GAO's original forecast, and Scenario 2 settings correspond to the "adjusted values" using the lowest SSA GDP forecast and SSA's highest  interest, and inflation forecasts, and adding in higher medicare costs.

Graph controls

The first section of controls lets you choose what to show, e.g. whether to show the baseline and/or current policy figures. You can look at 2 different scenarios,or compare 2 different values for 1 scenario (e.g. look at GDP vs. Debt). If you plot two different values you can choose to show them on the same axis, or     use 2 different axes (e.g.  to see interest rate vs. debt).

You can select which elements of spending are added in grouped into broad categories based on the GAO estimates of entitlements (Medicare, Social Security, Medicaid, etc), interest, and other spending.  

GDP: Select either the base GAO estimates for GDP, the lowest SSA estimate, GDP staying flat at  its initial level, or GDP per capita staying flat  (so the total GDP rises as population rises).

Population: The Social Security report medium cost scenario has population estimates that roughly match the GAO estimates. The SSA high cost scenario has a lower population growth estimate which is used when the "lower population" box is checked.

"Medicare High Costs": indicates whether to add in the "high cost scenarios" from the   reports for Medicare (adding it to both current and baseline figures for that). Note: This is not the "Alternative Medicare" report that the GAO adds in to the current policy scenario, this is  the  "high cost scenario" figures which are found in the  standard annual Medicare report (and some are in the Social Security Annual report). Not all the "high cost"figures extend out to 2090. The ratio of high to intermediate spending for the values that do go to 2090 is used to estimate the high cost values for the other figures.

Current Policy vs. Baseline differences:The "Alt." checkboxes allow you to see where the  spending differences arise between the  "baseline" and "current policy" figures in the GAO estimates. The current policy figures have higher spending in 2 different areas compared to the "baseline" figures: medical costs (for Medicare, Medicaid, etc) and  other spending. Checking those boxes adds them in to the "baseline" figures.  The GAO baseline scenario over the long run has a revenue of 17.9% while the current policy scenario rises to 21.4%. Checking the "cap revenue" box will cap   the maximum revenue for both figures to whatever is specified (though it won't raise the rates, e.g. specifying 19% will lower the baseline  revenue to 19%, but leaves the current policy revenue at 17.9%).

"Debt Impact": specifies whether the given GDP growth forecast is lowered using the strategies from the IMF or Reinhart papers and what values to use for the GDP growth reductions. It is assumed the GDP forecasts were made for the current debt level and GDP is reduced only for  debt above that level.

Interest Rates: The government interest forecasts all grow for a few years and then remain at peak values for the rest of the forecast.  The GAO forecast peaks at 3.14% (their nominal high rate is 5.2%, deflated by their 2% GDP deflator rate. They described how they derived the interest rate, they didn't actually provide it), the SSA Medium forecast at 3.22% and highest at 3.65% (their nominal rates deflated by their GDP deflator, rather than their CPI derived "real" rates).   The Treasury department provides monthly figures for the average interest rate on the publicly marketed national debt from 2000 on. The real interest rate (based on quarterly BEA GDP deflator figures) peaked in April 2001 at 4.886%, dropping to an average of 0.38% by 2004. The "reverse history interest" scenario in the graph below assumes the interest rate could potentially reverse course.  The "Reverse Historical" forecast uses the GAO rate for 2012 and then uses those figures in reverse, peaking at 4.886% from then on. The SSA provides historical monthly figures for their interest rates. Deflating them to real interest rates, they peaked at 9.09% in 1984 and dropped over the next 20 years to 0.92% in 2004. The "Reverse SSA History" interest rate uses those rates in reverse, then remains at the peak value for the rest of the forecast.

Inflation: The inflation rate options for the GDP deflator also vary for a few years and then peak at 2% for GAO, 2.2% for CBO, 2.4% for SSA Medium, and 3.3% for SSA Highest.

Borrowing Impact on interest rates:There is controversy over how much increased government borrowing will raise interest rates.  A simplifying assumption (perhaps overoptimistic) was made that the initial interest  forecasts would be accurate for the current debt and deficit levels and   rates only rise when borrowing rises above those levels. Most published work estimates  impacts using either increase in basis points per rise in the debt-GDP ratio or basis points per rise in the deficit-GDP ratio.  A paper by economics prof and Dean of the Columbia graduate school of business provides a theoretically derived value of 23.7 basis points per 10% increase in the  Debt-GDP ratio which appears to be conservative based on the data provided, while another paper suggests  30-50 basis points, and elsewhere  30-40. Estimates for the rise in interest rate per 1% increase in deficit/GDP ratio vary for instance from 25 to 19-45 BP. Another paper suggests that after an increase of 1% in the deficit to GDP ratio the interest rate constantly rises each year afterwards (which makes sense given debt is accumulating each year), the "cumulative" option uses their figures (continuing the trend their data implies beyond the 10 year example they give).

 If US finances get worse its likely the rate would eventually increase   faster than these estimates since they project rates that  are still comparatively low at the point where interest spending alone consumes all revenue. The estimates for how much interest rates rise can be applied in one of two ways (since the application of these papers is somewhat ambiguous). The "Current year" option assumes that the average interest rate on the debt is increased based on the debt level at the beginning of the year. That assumes implicitly that when the money was borrowed in the past the future debt's effect on the rate was built in. In reality some of that debt was borrowed years before that so the interest rate might not actually reflect that level of debt. The "year borrowed" assumption assumes the increase applies to the year the money is borrowed. The most recent Treasury "maturity profile" plan indicating the distribution of debt maturity they are aiming for is used to determine when to add the extra interest costs (the profile for 2022 isn't that much different from 2012's and for simplicity is asumed to continue for the rest of the forecast).

For some time scales  the graph represents something that couldn't happen in the real world, e.g. interest spending that costs more than revenue since the country would be bankrupt by then. When the GDP falls too much, some figures skyrocket so you may need to shorten the timescale to see a useful view of some scenarios. The GDP is given a floor of $1, which of course also couldn't happen in real life but helps keep the values in some graphs viewable instead of letting the GDP go even further down into meaningless negative values.

If the graph doesn't display:

The graph uses Micsosoft's Excel Web app and Skydrive, which have sometimes been unavailable or overloaded lately so if you don't see the graph appear you might try again later. If the graph is visible and the line below it says the status is "Ready for Input." it should be working ok.  Sometimes Microsoft only displays an error to the user and this page doesn't know it needs to reload the graph. If the graph isn't visible you might try clicking the "reload" button, reloading the whole page resets the form and loses any values you may have changed.  Microsoft times out your connection after a few minutes so if you make changes after the graph has been idle for a few minutes the page keeps trying to reload the graph but gives up after a few minutes. Click reload to do it manually.  If you have an older browser version and the graph never shows then try a newer/different one. (e.g. it seems to require Internet Explorer 9 or later which isn't available for Windows XP (even though some Excel web apps seem to work on IE8), but works with Firefox under XP. For this non commercial page time wasn't spent testing all browsers).

Other site pages related to these issues

This site went to add in the real $ high cost Social Security scenario. It turned out there isn't one, the high cost scenario looks like it is high cost in nominal $, but it turned out to be the *low cost* scenario when adjusted for inflation. It turned out that wasn't the only problem with the numbers.  The Medicare scenarios use some of the same assumptions as the Social Security ones, so those are called into question as well. For more see:

   Social Security forecasts are very unrealistic, we don't have good estimates for what it will cost.

Even without taking into account the potential for debt to slow the economy the government estimates of GDP are questionable:

   Government overestimates future economic growth. US GDP growth is unlikely to be exponential.

This page assumes tax revenue drops when GDP growth slows. Since government spending seems to grow steadily, it seemed to make sense to conservatively assume spending wouldn't slow even if GDP growth did. Checking history shows that if anything spending might increase:

   Usually the faster government spending grows, the slower the private economy grows (and vice versa)

The projections  this page uses deals extending the projected forecast  by GAO. Although that is mostly good enough for the purpose of projecting future deficits, it turns out they (and the CBO and budget proposals from allsides) leave off a large chunk of federal spending (and in fact ignores part of the federal debt):
   Federal reports show government hides spending&debt (e.g. $6.5 trillion in pension liabilities not in national debt).

Congressional and Presidential Budget proposals

Most of the debate over current proposals involves spending within the general range of the two forecasts used on this page. Unfortunately budget proposals usually only forecast a few years in the future. The public should demand that they provide longer term figures to be sure their proposals aren't merely finding ways to postpone certain spending and need to balloon afterward.

This site might add a new page  when the new presidential budget is released comparing that and the major congressional proposals (it depends partly on whether the author can afford to allocate time to it, and on whether this got the point across well enough regarding the mess govt. finances are in if so whether other policy areas are more useful to address).

Appendix (Spread the word, and Technical Notes).


Technical notes:

All the spending data (given as % of GDP by the GAO) was converted into real $ figures. For projections where the GDP is altered the spending then remains the same.

Assumption details the casual reader can skip : the Reinhart paper projects that after total debt (including intragovernment debt) reaches 90% of GDP for 5 years (which it will have done by 2015) annual growth is reduced  by 1.2%. The IMF paper refers to a slowdown in per capita GDP growth rates of 0.16% per 10% increase in publicly held debt to GDP ratio   for medium size  debt  (60-90% of GDP) and 0.19% for higher debt levels. At the low rate of population growth forecast the total GDP growth slowdown would about the same as the figures given for per capita growth slowdown figures (it'd be a trivial amount higher since it translates into "GDPGrowthSlowdown=PerCapitaSlowdown*(1+PopulationGrowthRate) - 1"). The paper indicates that advanced economies may suffer less slowdown, but it doesn't breakout what the slowdown would be for the different levels of debt  so   the  average figures are used. That seemed an appropriate  estimating tradeoff since it also notes the impact may be nonlinear (i.e. higher for higher debt levels), and because the increased debt due to higher interest rates isn't included, so it likely winds up being overoptimistic.]

The   spreadsheet  was a "scratch" work in progress meant to just check out the issues which grew organically as options were added to explore possibilities, it should be redone and polished for future use.  The author hasn't taken time to polish it for public consumption (the author usually develops software, not spreadsheets) but figured it was most useful to release it anyway rather than delay. The budget never balances in the GAO scenarios, so this version   relies on that as a simplifying assumption which will need to be altered if they truly do have proposals for balanced budgets. This version assumes everything adds costs to the GAO scenarios (rather than ever reducing them)  and keeps a running total of added debt, which it compounds at the real interest rate used in the forecast and adds to their debt totals.

It started out as an Open Office document using their scenario format. Those that sometimes use spreadsheets to analyze data rather than statistical packages  should be aware that Excel is fine for simple calculations but has a history of numerical bugs in things like its statistics routines and trend analysis routines (e.g. see here, here, here and here just for a start). By default this site uses Open Office (or the NeoOffice Mac variant of it) or Libre Office.

When the idea arose  to create an interactive spreadsheet it had to be converted to Excel (other options like Google Docs wouldn't work to let the public edit a copy of it), which required some fixes due to compatibility issues which made it a bit more cluttered (their scenarios didn't import, name scopes were off, etc, etc). , and a separate sheet added for variables used to control it.  After the online version was added, it seemed to make sense to add controls within the Excel version to a control page to allow the same sort of interaction with Excel (the control page is removed before uploading it to Skydrive since the online version of Excel chokes on controls). Note: the author did this using a trial version of Excel (hesitating to support a buggy product), only if there is concrete interest shown in the form of tips to cover the cost will  Excel be bought, so no updates can be provided until then since the trial expired.

The spreadsheet is provided only for you to interact with and change for personal use. In the unlikely case you wish to make a derivative version for non-personal use, make an offer worth the  time to consider. (see about page for contact info).