The Fiscal Responsibility Act is expected to have a significant impact on the nation's debt-to-GDP ratio, according to a recent assessment by the Congressional Budget Office (CBO).
Noted economist David Wessel shared on Twitter that the CBO projects the ratio to reach 115% in 2033, down from the pre-law baseline of 119%.
"CBO says Fiscal Responsibility Act will bring debt/GDP ratio to 115% in 2033; pre-law baseline was 119%. Ratio currently is around 98.2% of GDP," said Wessel, director of the Hutchins Center on Fiscal and Monetary Policy and senior fellow in Economic Studies at the Brookings Institution in a recent Twitter post.
According to the CBO's analysis, the act is projected to reduce deficits by approximately $1.5 trillion between 2024 and 2033 when compared to the baseline budget projections released on May 12.
The primary driver of this deficit reduction is the assumption that the statutory caps included in the act will limit discretionary funding not only in 2024 and 2025 but also in subsequent years. As a result annual deficits are expected to decrease from $2.9 trillion in 2033 to $2.7 trillion, and the cumulative deficit for the 2024-2033 period is estimated to be $18.8 trillion.
President Biden has signed the Fiscal Responsibility Act of 2023 into law, effectively suspending the limit on federal debt until Jan. 1, 2025. The act encompasses various provisions that affect federal spending and revenues, including the imposition of caps on most discretionary funding for 2024 and 2025.
It also rescinds unobligated funds allocated in response to the COVID-19 pandemic and modifies work requirements for recipients of benefits from programs like the Supplemental Nutrition Assistance Program and Temporary Assistance for Needy Families. Furthermore, certain funds provided to the Internal Revenue Service are also rescinded under the new law.
The enactment of the Fiscal Responsibility Act also has implications for federal debt. The reduced projected deficits, as estimated by the CBO, lead to a decrease in the agency's projections of federal debt. In the CBO's May 2023 baseline projections, debt held by the public in 2033 was anticipated to be $46.7 trillion, equivalent to 119% of the gross domestic product (GDP).
However, subtracting the estimated $1.5 trillion reduction in projected deficits resulting from the Fiscal Responsibility Act, the debt held by the public in 2033 is projected to be $45.2 trillion, approximately 115 percent of GDP. This represents a reduction of around 3%.
Additionally, the act is estimated to result in a $1.5 trillion decrease in the CBO's projections of debt subject to the statutory limit, which includes debt held by the public, along with Treasury securities held by federal trust funds and other government accounts.