In most years, CBO examines budgetary outcomes under both the extended baseline and an extended alternative fiscal scenario. Under the alternative fiscal scenario, current law would be changed to maintain certain policies that are now in place. In order to release this report when it would be most useful to the Congress, CBO examines budgetary outcomes for the extended baseline only in this report. The agency expects to examine budgetary outcomes under both the extended baseline and an alternative fiscal scenario in the next report in this series.

Why Federal Debt Has Grown in Recent Years

Debt held by the public is the amount of money that the federal government has borrowed in financial markets by issuing Treasury securities—including those held by the Federal Reserve—to pay for its operations and activities. Debt as a percentage of GDP is a useful measure for comparing amounts of debt in different years because it shows debt in relation to the size of the economy. That measure places the effects of potential adjustments to the budget within the context of the nation’s resources. If debt as a percentage of GDP rises indefinitely, then debt will become unsustainable because the costs of financing deficits and servicing the debt will consume an ever-growing proportion of the nation’s income. In particular, when the economy is operating close to its potential output, the Federal Reserve in all likelihood will not be able to extensively support government borrowing without increasing expected inflation and causing an erosion of confidence in the U.S. dollar as an international reserve currency.

Federal debt held by the public has increased significantly in recent years. At the end of 2007, federal debt was 35 percent of GDP. Deficits arising from the 2007–2009 recession and from policies implemented to counter the effects of the downturn caused debt to grow in relation to the economy over the next five years. By the end of 2012, debt as a share of GDP had doubled, reaching 70 percent, and it has climbed since then, reaching 79 percent by 2019.