CBO made a technical change to its projections of discretionary spending over the longer term. Those projections now incorporate a five-year phase-in period starting from the second decade of the projection period (from 2031 to 2035 in this year’s projections)—in which discretionary spending transitions from growing at the rate of inflation to growing with nominal GDP.14 After 2035, the end of the phase-in period, CBO’s current extended baseline projections, like last year’s projections, reflect the assumption that discretionary spending will grow with nominal GDP.
Over the last two decades of the projection period, discretionary spending in the agency’s current projections is higher than it was in last year’s projections. Whereas last year discretionary spending as a share of GDP was projected to be 4.9 percent in 2031 and 5.1 percent in 2049, this year, such spending is projected to be 5.7 percent in 2031 and 5.6 percent in 2049.15
Net Spending for Interest
As a share of GDP, net spending for interest—that is, the government’s interest payments on debt held by the public minus interest income that the government receives—is projected to be lower than projected last year through 2033 and then higher for the remainder of the projection period. Whereas in last year’s projections such spending rose from 2.1 percent of GDP in 2020 to 3.0 percent in 2030 and averaged 2.7 percent over that decade, in CBO’s current projections, such spending declines from 1.6 percent of GDP in 2020 to 1.1 percent in 2025 and then increases to 2.2 percent in 2030, averaging 1.5 percent over the 2020–2030 period. By 2049, net interest spending is projected to reach 7.7 percent of GDP—2.0 percentage points higher than projected last year (see Figure B-2).
Since last year, CBO has lowered its projections of interest rates for most of the 30-year period, resulting in projections of net interest spending as a share of GDP that are lower than last year’s estimates through 2033 despite increases in the agency’s projections of federal debt. Thereafter, the increases in federal debt more than offset the effect of the lower interest rates in CBO’s current projections, so net spending for interest in those later years is now higher than it was in last year’s projections. (For a discussion of changes to CBO’s projections of interest rates, see Appendix A.)