The 2020 Long-Term Budget Outlook

CBO revised its projection for the period after 2024 to better reflect the average effects of business cycles that are expected to occur in the remaining 25 years of the projection period. Historical data show that during and after economic downturns, actual output falls short of potential output to a greater extent and for longer periods than actual output exceeds potential output during economic booms. On average, that observed asymmetry decreases the demand for goods and services, resulting in less upward pressure on prices. To reflect that historical experience, CBO reduced average inflation slightly in the second and third decades of the projection period. CBO also slightly reduced the projected difference in growth rates between the GDP price index and the CPI-U to better reflect recent historical data. The difference between the inflation rates for those two price indexes is now projected to average 0.3 percentage points in the second and third decades of the projection period, about 0.1 percentage point less than last year’s projection. As a result of those changes, over the second and third decades of the projection period, the GDP price index grows less than 0.1 percentage point more slowly, on average, than in last year’s projection, and the CPI-U grows about 0.2 percentage points more slowly.

Interest Rates

CBO projects the interest rates that apply to federal borrowing, including the rates on 10-year Treasury notes and special-issue Social Security bonds. It also projects the average interest rates on federal debt held by the public and on the bonds held in the Social Security trust funds. Those rates influence the cost of the government’s debt burden and the balances of the trust funds.

After considering a number of changes in its projections from last year, including slower growth in the labor force, slower growth in TFP, and more government debt, CBO expects real interest rates on federal borrowing to be lower in the future than their average over the 1990–2007 period, the period CBO uses for historical comparison. The real interest rate on 10-year Treasury notes averaged roughly 3.1 percent between 1990 and 2007.18 That rate has averaged 0.8 percent since 2009 and is projected to be 0.9 percent in 2030. In CBO’s projections, the rate rises thereafter, reaching 2.5 percent in 2050. That rate is 0.6 percentage points below the average real interest rate on 10-year Treasury notes over the 1990–2007 period. CBO’s current projections of real interest rates over the 2020–2049 period are lower, on average, than last year’s projections because of the unprecedented low rates caused by the pandemic and the prolonged recovery from the pandemic that is expected to occur. After 2030, the real interest rate on 10-year Treasury notes is expected to rise at a faster pace than projected last year because debt as a share of GDP rises at a faster pace than was projected last year. By 2049, the agency projects the real interest rate on the 10-year Treasury note to reach 2.5 percent, 0.3 percentage points higher than last year’s projection.

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