CBO Director Warns Debt Will Surpass WWII Levels, Interest Rates To Spike | Phillip Swagel
Summary
Fiscal Deficits: The CBO reiterates the U.S. fiscal trajectory is unsustainable with debt-to-GDP rising and persistent near-$2T deficits.
Interest Costs: Net interest payments are projected to climb from about $1T this year to $2.1T by 2036, crowding out other budget priorities.
Trade Tariffs: Supreme Court action striking AIPA tariffs could add ~$2T to deficits; the administration’s new 10% tariffs and potential changes are being assessed for budget and macro impacts.
Energy Prices: The Iran-related conflict has driven fuel prices higher; if sustained, the energy shock could transmit into broader inflation and shape Fed policy.
Middle East Conflict: Additional supplemental war funding is likely but uncertain in size and duration, with eventual budget updates dependent on conflict scope.
Generative AI: CBO builds in a ~10 bps annual productivity boost from AI, acknowledging labor-market disruptions but maintaining an overall optimistic view on growth.
Inflation Risk: Deficits can fuel inflation depending on monetary policy; sustained energy shocks and debt monetization would heighten inflation risk, though such scenarios are viewed as distant.
No Stock Picks: No specific public companies or tickers were discussed; focus remained on macro themes impacting sectors like energy and tech productivity.
Transcript
It's Tuesday, March 24th. The national debt crossed $39 trillion on March 17th, just 5 months after hitting $ 38 trillion. And it's growing at roughly $7.2 billion per day. The Congressional Budget Office's February outlook projects a $1.9 trillion deficit for fiscal year 2026, rising to $3.1 trillion by 2036, with debt held by the public reaching 120% of GDP and surpassing the postw World War II record by 2030. Net interest payments alone are projected to hit $1 trillion this year and double to $2.1 trillion by 2036. In the CBO's own words, the fiscal trajectory is not sustainable. But even these projections may already be outdated. The Pentagon is seeking $200 billion in supplemental war funding on top of the $150 billion Congress already gave the Department of War in last year's Reconciliation Act. None of which is reflected in the CBO baseline yet. Meanwhile, the Supreme Court struck down the AIPA tariffs on February 20th, and the CBO estimates that this ruling could add $2 trillion to projected deficits over the next decade. The bond market is already starting to reflect higher government outlays with the 10-year Treasury yield climbing to roughly 4.42%, up almost 12% since the Iran war began on February 28th. So, what does not sustainable look like for the economy? And are we headed for a debt crisis or even outright default? What needs to change? Follow for more daily updates. Our next guest is the person responsible for telling Congress exactly how deep this fiscal hole runs. Joining us now is Philip Swaggel, the director of the Congressional Budget Office. Dr. holds a PhD in economics from Harvard University and previously served as an economist at both the Federal Reserve and the US Treasury during the 2008 financial crisis where he helped design TARP and sat on the investment committee that decided which banks received bailout funds. Dr. Swiggel, it's an honor to have you back on the show. Welcome back. >> Yeah, thank David. Thanks very much. >> It's a pleasure to have you back on that show. Uh, Philip, uh, what changed since the last time we had you on the show in February, uh, sorry, in fall 2024 versus now? We'll talk about that. We'll talk about the projections that the CPO has published recently this quarter. And, uh, I want to start by talking about how the Iran war may or may not change uh, your budget projections. The Pentagon is requesting an additional $200 billion in supplemental funding for the Iran war on top of the $150 $150 billion that Congress already gave the uh Department of War in last year's reconciliation act and the CBO's existing $ 1.9 trillion deficit projection for the fiscal year does not include any supplemental war spending. So should it be approved? Uh Philip, how will the budget change? >> Uh no, very good. It's something that CBO tracks. Um, and in the past, the agency has provided Congress uh with this information on a regular basis. I mean, thinking back to the days of uh the US involvement in Iraq and Afghanistan, there were regular CBO updates about the overseas contingency operations. The OCO was the budget um uh nomenclature. Um and we would provide that again. It's a little bit too soon for us to do it yet. We don't know the duration of the conflict. We don't know the scope, you know, the ultimate scope of it. Um, and we would rely on the um, the administration for that information. So, we're watching. We're waiting. Yeah. I mean, there's a lot of people wanting this information and we will provide it as soon as possible, but it's just it's just a little bit too soon to know this yet. for for a conflict such as this, how long does it usually take for the CBL to estimate um how expensive ultimately it might be? >> Ah, I mean it's it really depends on the nature of the conflict. Um and that's why with you know with Afghanistan and Iraq, the CBO eventually settled into a regular pattern of updates and you can see that in our um baseline updates, the ones that you just mentioned that we published in February 2026. If you go back to the ones that were published in 2013, 2014 and so on, those had regular updates. Um, and in fact, one of our one of our senior managers is the one who uh originated that, you know, those just recognizing that there was broad interest and providing that in a regular format. So, we'll do it. It's just a little hard to do it yet when so much remains um unclear and uncertain, unknown about the conflict. I think the um general public may just be wondering right now, Philip, how their expenses or outlays are going to change uh when there is a shock to the budget such as an Iran war that's lasting a little bit longer than already initially projected. In other words, will our taxes increase? Um will there be cuts to social programs that have already been budgeted? Any changes to our, you know, regular life besides inflation, which we'll talk about? >> Uh okay. Yeah, it's um you know again it will depend on the nature of the ultimate you know the ultimate nature of the conflict um you know if the conflict um ends relatively soon and in you know within a few months uh and energy prices go back to where they were before the conflict well then you know they're not likely to be um you know a huge uh impact they would be long you know looking back in retrospect Um it's just hard to know what um you know what the impacts will be because it it depends so much on the um you know the outcomes and the duration and scope of the conflict. So when it comes to inflation, you told me last time on the show deficits can cause inflation, but it depends on the interaction with monetary policy. So, with gasoline prices going through the roof, with diesel now seeing a new crisis at just under $5 a gallon, uh what do you think should be the calculus for the Federal Reserve right now? >> Okay. Yeah, it's something that we're watching uh and obviously the Fed is as well is how much does the energy shock that you know we're all seeing and that you just mentioned um in this transmit through to broader measures of inflation. Uh and again if that you know if the shock is relatively short-lived uh energy prices revert back to where they were before the conflict then that you know of course it affects families and affects budgets you know household budgets but is not a long-lasting effect on the economy or on inflation. Um if the conflict is longerlasting and the impact on energy prices is um you know is longlasting well then that affects inflation and eventually it'll uh broaden out from you know from the energy into into broader uh measures of inflation. It's just we're still at the early stages of uh of this. So it's still just hard to know. >> Let's show the audience uh the projection here from the >> Oh, very good. Yeah. Thank you. from the uh this is the statement on um the publication of our budget outlook. Yeah, thank you. >> Absolutely. So last uh well when I had you on in 2024, the fiscal year 2024 deficit was roughly 1.83 trillion. Um and the CBO now projects 1.9 trillion for fiscal year 2026. Um is it fair to say that not a lot has changed in terms of outlays and uh receipts >> from 2024 to now? It's interesting and right it's kind of where you started with the changes since you and I last talked. >> Yeah. >> There's a lot that's happened. I mean um right we have a new uh administration. I mean President Trump's second term. >> That's right. >> There have been large uh tariffs put on. There is a a very large reconciliation bill passed. The president signed into law on July 4th of last year. Um so there's huge changes. It changed outlays. It changed revenues. Um and yet there's some things that are the same. The fiscal deficit is still large, still around you nearly$2 trillion dollars in our projections um for this year and rising. The debt to GDP where you started the show is also remains large and rising. So um yeah, that's what's that's in the nature of um of the the last year or two. There's big changes but netting a lot of these things out the overall fiscal trajectory remains in qualitative qualitatively similar. >> How have tariffs changed government receipts? Uh the claim is that uh the deficit was narrowed somewhat by higher tariff revenues. Is that true according to your numbers? >> Yeah, that's right. So, in our um February 2026 baseline projections, we had the tariffs reducing deficits by $3 trillion over the 10-year budget window. Um, as com as by way of comparison, the 2025 reconciliation act increased deficits by 4.7 trillion. So the tariffs did not, you know, exactly offset the entire cost of um of the 25 reconciliation act, but a good chunk of it. Um so they did raise revenue. you know, the Supreme Court decision um I guess is is what three weeks ago now as we talk um >> uh eliminated some of the tariffs, the ones that were passed by the AIPA uh the Emergency Economic Powers um act um and we calculated that that would increase the deficit by about$ two trillion dollars. So the elimination of those tariffs. Now, the administration has, you know, since taken other actions. They've put on a a 10% tariff using other authority. They've talked about changing that, you know, from 10 to 15. Um, and we're still analyzing that. But, um, for sure the changes in tariffs have large impacts on revenues and therefore on the budget deficit and also on the economy. Are you in your um office assuming then that if tariffs were struck down by the Supreme Court, there wouldn't be any changes to economic activity, in other words, more spending um I guess uh more demand because tariffs are no longer in place, thereby increasing government taxation revenue uh simply from more economic activity, not so much from tariffs being collected. Is that is that the assumption here? >> Right. From the other activity. No, no, it's a good point that the tariffs of this size have macroeconomic effects um putting them on or taking them off. Um and in our budget baseline, we did look at that at those um instances that the the macro feedbacks between the tax polar policy and the macro um and we discussed it in the in the outlook. We haven't done that yet for the Supreme Court decision or the subsequent uh administration actions. Um and we will in a sense we need to wait for the um the administration's actions to settle down and for us to get a sense of where um you know where the eventual tariff policies will um will end up. But it could have a macroeconomic um uh feedback. Absolutely. Generally, how does a CBO make economic projections for GDP or growth if that's something that's uh within your domain? Because ultimately, you do have to project how the economy will grow in order to roughly estimate or um or speculate as to how much tax receipts will grow proportionally to uh spending. >> Oh, okay. No, very good. I just I'm I'm smiling um at the you know estimate speculate the word we use we use project that we project but estimate yeah estimate is fine and speculate I mean you know >> we don't speculate we don't we project all right >> yeah no no I totally understand the uh the the meaning there um uh yeah sometimes you know I I have to I catch myself before I use certain words so that's the word I catch myself before using you understand um so um no but Look, it's a challenge of the job is that exactly as you said, we have to have a projection for the economy in order to do our other projections of of outlays and revenues and revenue is natural, right? That that you know where the economy goes drives um the receipts that the federal government takes in. But there's also spending that is geared to the economy. If the economy is strong, well then the certain means uh spending that will be lower. There'll be fewer people unemployed. There will be fewer people um getting food. Yeah, what used to be called food stamps, now SNAP benefits, supp supplemental nutrition assistance program benefits. And so it the economy does matter and it matters both on the spending side and the revenue side. >> So that leads me to discuss the uh director's um statement which we showed earlier going down to this particular sentence here. Our budget projections continue to indicate that the fiscal trajectory is not sustainable. We discussed this in 2024. Um it seems like the CBO is doubling down on this view. Uh can you just elaborate more on why your view is not is that this is not sustainable? >> Yeah, if you scroll back up just a little bit to the debt Yeah. there to that chart. Just put that chart in view. It's that is the challenge. And this is the I mean this is a stocks. This is the the um debt held by the public as a share of GDP. And you can see it just keeps going and compare it to what happened in the 1940s. So you can see of course we had a you know World War II and um in the 1940s the debt rose as you know the US government borrowed. This is a you know sort of you know all these famous posters of um you know buy war bonds and then the debt was paid off in in large part by the generation that fought the war and now the greatest generation and now we see on the the right hand side of the screen the debt ratio. Exactly. Yeah. Thank you for your pointing. The debt ratio going up um and and not coming back down. Now that's under current law and it's one of the um uh you know one of the ways in which we construct our our estimates is current law. This is a stock but there flow measures associated with it interest payments or um uh you know other things that um you know would be very challenging at some point as the debt continues to rise. So this is unprecedented for the United States in terms of how far the debt to GDP uh will climb. However, we can look at other G7 nations perhaps at Japan as maybe a proxy to see how their economy performs under such high debt loads. Uh can we do that Philip? Is that fair to do? >> Yeah, I mean that would be one way of looking at it and as you said Japan has a you know also a high debt to GDP ratio. these other countries, Belgium, um, and some others. Um, you know, Japan's economic performance, well, it's still a rich country, of course, a very advanced country, but it has had decades now of slow growth. Um, and part of that is a demographic challenge in Japan, but the debt ratio is probably also an impediment to um to growth. Um, and so it gives us insight. you know the US is remains a special economy. I mean the the dollar has a special place in the world um economy and financial system. So we have some advantages. That's why you know we're continuing to um indicate that the debt is not sustainable. But it's not that there's a crisis tomorrow or the next day or anytime soon. It's what what what we mean is that action needs to be taken to to change the fiscal trajectory, but it's not it's not that it has to be done at any one moment. It just has to be done over time. >> So So when you when you warn that the fiscal fiscal trajectory is not sustainable, what does that mean practically speaking? I mean, we're not talking about a debt default, sovereign debt default, are we? >> No. I mean, no, absolutely not. And of course the US borrows in dollars and and the US government creates dollars. So uh you know eventually the unsustainable fiscal situation would show up as investor concerns about US securities that show up as higher interest rates or you know weaker dollar but more likely higher interest rates since the dollar has to be weaker against something. Um it could be higher inflation eventually. Um and so it's it's kind of things aspects of economic policy or economic developments that would undercut our prosperity, you know. So it's not and not like a sharp, you know, I'm chopping my hand. It's not like a sharp, you know, we fall off a cliff, but it'd be a slow undermining of our shared prosperity. If the government, if the central bank were to monetize the debt, meaning they were to create new money to purchase existing debt, uh would that solve the problem? >> I mean, it would result in high inflation, right? That would be um in some sense is almost like a form of a soft default, right? The US is paying back the debt but paying back in dollars that are worth less. Now, of course, we are, you know, way way way far away from that. Um and the you know the Treasury the Treasury Secretary has talked about reducing the deficit. He's talked about stronger growth 3% growth and a 3% um uh deficit. So um yeah, so that that's the policy of the administration is to take on this problem and um and that's you know that look that's that's what's needed and so that um you know that that's why we're I think we're still very far away from the kind of you know high inflation world. I think importantly the uh interest payments on this debt will rise and so your February 2026 outlook projects that net interest payments will rise from one trillion roughly 1 trillion this year to 2.1 trillion by 2036. Uh that's rising from 3.3% of GDP to 4.6%. In your monthly budget review, it shows interest costs rising already 8% year-over-year through February. So, at what point does these higher uh does this higher interest payment eat into other um government uh spending um programs such as Medicare, Medicaid, Social Security, and so on. >> Yeah. Yeah. I mean, that that that is really the challenge that you've put your finger on is that um the rising interest payments crowd out other priorities. um and and crowded in the sense of policy makers have to consider the overall fiscal picture um and dollars going to one thing can't go to another thing and so either we need you know lower spending on other things or higher taxes and more revenue and that's the way in which the um the figures uh you know the interest figures that you point to are a policy challenge. I I know it's not the um role of the CBO to actually enact policy and change legislation, but in the past, you've studied this a lot. What typically happens when interest payments go up as a percentage of GDP? Do we have historically have we seen higher taxes? Have we seen just cuts? >> You know, what changes? >> Ah. Oh, I see. Yeah, it's um that's a good question. I don't know if there's a historical precedent for what happens because it's really up to policy makers and the adjustment could be in either direction or in both. You know, it could be more revenue, it could be um lower spending, it could be some mix of that. Um and from CBO, we don't recommend particular solutions to policy makers. We don't say do this or do that but you know we just say some action needs to be taken and then we support the Congress as as they decide what to do. >> You have uh a forecast on real GDP growth as well which um I'm going to show on the screen in just a minute. It assumes I guess I think a real percent uh yeah here we go a real GDP growth rate uh long run of 2% or just under yeah just under 2% 1.8% 8% um and you're assuming that uh your projections of economic growth incorporate a positive effect of generative AI on productivity growth amounting to an increase of about 10 basis points per year. A lot of people uh and members of Congress are concerned about the negative effects of AI on the labor market. Um, in your projections, have you accounted for uh the possibility of more layoffs and higher unemployment uh from the rise of AI uh thereby probably reducing consumer spending in demand or is that not a baseline projection for you? >> Ah, okay. No, it's a great question. Um, so as you say, there's going to be disruptions from AI and we're starting to see some of that in the labor market already. Um you know on the other hand there are potentially large gains um to productivity to incomes and to overall GDP. Um and that's the challenge is figuring out the the this is the mix of the gains and the disruptions and the relative the costs. So what what we've done so far is we've looked at the improvements to productivity in the activities that we already analyze and so this is the like coders or programmers as people my age would call it um right it increases their productivity we we have that already in some of our internal activities the use of AI has increased our internal productivity and so that's the basis for the 10 basis point uh increase in productivity then there's the changes and disruption and opportunities and there's going to be new um you know new jobs and new occupations and things that we don't even contemplate. I mean who who would have thought of a podcaster 30 years ago, right? I mean there's radio shows and now like news radios are shutting down and podcasters are taking over. So um yeah, so we're watching that. We know there's gonna be both positives and disruptions, but we don't have and so we just don't have a basis yet for um for that. And so that's something that CV will be watching uh in the future. >> Yeah. Podcasters taking over radio. Uh in the future, you'll probably be talking to a robot instead of a real person. We'll see what kinds of questions. >> Yeah. I mean, I you know, look, I'm I'm positive. I'm pretty optimistic about the economy. Yeah. um in you know recognizing the disruptions but I you know AI is making us more productive and that's what I would see right for your like your research >> you'll have an AI agent helping you with your research and identifying questions you still need to use your judgment okay what's the right question and what you know what's the followup and it's the same thing where you know we're trying to figure out how to use this best >> uh we have uh a few minutes left so before we close off let me just ask you uh how you think the budget may uh change or sorry let me rephrase that question. What milestones or markers in the economy would move your budget projections either way uh either a reduction in the deficit >> or uh or higher deficits into 2027. >> Oh, okay. Okay. No, no, very good. That's a great question. All right. So, let me just tick off a couple things we're watching. One is what happens with tariffs. um right we had the Supreme Court decision. The administration has responded in part already and now is undertaking a number of investigations based on their tar tariff authorities. And so we're watching those to see where those go, what those mean for the economy, what those mean for revenues. So that's one thing is looking at uh revenues. The president will put out a budget at some point uh later this spring. Um we're watching for that. We're watching for any um uh supplementals like you mentioned earlier for um to fund the conflict in uh in Iran um or with with Iran. Um and then we're watching growth in productivity including the positive effects of the 2025 tax act uh well reconciliation act on the economy and in particular the tax provisions. Right? So the 25 act extended the lower taxes from the 20 December 2017 tax act. Those have a positive effect on investment and then from there to growth and employment. We have a pretty optimistic view of of those but there are some people who think that we're not optimistic enough and we're watching. We're trying to distill well what is the effect of the 2025 act on the economy on investment on job creation and then you know compare that to our projections and so those are that's another big milestone that will play out this year >> my final question and maybe you can answer this in one minute or less the projections that the CBO have uh put out have caused a lot of concern in the economic community um this is just an expost that I saw today uh negative numbers exclude social security and Medicare. CBO projects um add another 50 to 70 trillion in unfunded obligations over the la over the next 30 years. Um economists like Steve Hanky and David Walker, Steve Hank is a regular my program wrote unfortunately on March 23rd that these numbers would constitute insolveny under any standard accounting framework. Can you just make a statement to the general public on uh basically reacting to this kind of sentiment which is very common place amongst economists looking at the numbers that the CBO have released. Okay. Well, so first of all, I would follow the Treasury and I would not use that word. Um I the fiscal trajectory is challenging. It's daunting. It's unsustainable. >> Markets clearly believe that we as a nation will take action to address this challenge. And the Treasury, the Treasury Secretary has talked about taking action. And that's what I that's what I look to. um they have this is the the the targets that would make a meaningful adjustment in our situation. Um and markets implicitly markets believe that we as a nation will take action to address this uh this challenge because you know you look at financial markets and the you know the the dollar remains the number one currency in the world. at the US Treasury funds our our deficits investors have confidence in the US we continue to grow and create jobs so um you know so that's why I think with challenging daunting but um you know I remain optimistic okay thank you very much Philip and I encourage everybody to check out the CBO's projections links down below uh you can look at their projections and um and any changes in detail it's beyond the scope of a 25minut conversation today but thank Thank you so much, Philip, for lending us your time and and informing the public. I appreciate it. Thank you. >> Yeah. Thanks, dude. Pleasure. >> Okay. >> Thank you for watching. Don't forget to like, subscribe. Take care.
CBO Director Warns Debt Will Surpass WWII Levels, Interest Rates To Spike | Phillip Swagel
Summary
Transcript
It's Tuesday, March 24th. The national debt crossed $39 trillion on March 17th, just 5 months after hitting $ 38 trillion. And it's growing at roughly $7.2 billion per day. The Congressional Budget Office's February outlook projects a $1.9 trillion deficit for fiscal year 2026, rising to $3.1 trillion by 2036, with debt held by the public reaching 120% of GDP and surpassing the postw World War II record by 2030. Net interest payments alone are projected to hit $1 trillion this year and double to $2.1 trillion by 2036. In the CBO's own words, the fiscal trajectory is not sustainable. But even these projections may already be outdated. The Pentagon is seeking $200 billion in supplemental war funding on top of the $150 billion Congress already gave the Department of War in last year's Reconciliation Act. None of which is reflected in the CBO baseline yet. Meanwhile, the Supreme Court struck down the AIPA tariffs on February 20th, and the CBO estimates that this ruling could add $2 trillion to projected deficits over the next decade. The bond market is already starting to reflect higher government outlays with the 10-year Treasury yield climbing to roughly 4.42%, up almost 12% since the Iran war began on February 28th. So, what does not sustainable look like for the economy? And are we headed for a debt crisis or even outright default? What needs to change? Follow for more daily updates. Our next guest is the person responsible for telling Congress exactly how deep this fiscal hole runs. Joining us now is Philip Swaggel, the director of the Congressional Budget Office. Dr. holds a PhD in economics from Harvard University and previously served as an economist at both the Federal Reserve and the US Treasury during the 2008 financial crisis where he helped design TARP and sat on the investment committee that decided which banks received bailout funds. Dr. Swiggel, it's an honor to have you back on the show. Welcome back. >> Yeah, thank David. Thanks very much. >> It's a pleasure to have you back on that show. Uh, Philip, uh, what changed since the last time we had you on the show in February, uh, sorry, in fall 2024 versus now? We'll talk about that. We'll talk about the projections that the CPO has published recently this quarter. And, uh, I want to start by talking about how the Iran war may or may not change uh, your budget projections. The Pentagon is requesting an additional $200 billion in supplemental funding for the Iran war on top of the $150 $150 billion that Congress already gave the uh Department of War in last year's reconciliation act and the CBO's existing $ 1.9 trillion deficit projection for the fiscal year does not include any supplemental war spending. So should it be approved? Uh Philip, how will the budget change? >> Uh no, very good. It's something that CBO tracks. Um, and in the past, the agency has provided Congress uh with this information on a regular basis. I mean, thinking back to the days of uh the US involvement in Iraq and Afghanistan, there were regular CBO updates about the overseas contingency operations. The OCO was the budget um uh nomenclature. Um and we would provide that again. It's a little bit too soon for us to do it yet. We don't know the duration of the conflict. We don't know the scope, you know, the ultimate scope of it. Um, and we would rely on the um, the administration for that information. So, we're watching. We're waiting. Yeah. I mean, there's a lot of people wanting this information and we will provide it as soon as possible, but it's just it's just a little bit too soon to know this yet. for for a conflict such as this, how long does it usually take for the CBL to estimate um how expensive ultimately it might be? >> Ah, I mean it's it really depends on the nature of the conflict. Um and that's why with you know with Afghanistan and Iraq, the CBO eventually settled into a regular pattern of updates and you can see that in our um baseline updates, the ones that you just mentioned that we published in February 2026. If you go back to the ones that were published in 2013, 2014 and so on, those had regular updates. Um, and in fact, one of our one of our senior managers is the one who uh originated that, you know, those just recognizing that there was broad interest and providing that in a regular format. So, we'll do it. It's just a little hard to do it yet when so much remains um unclear and uncertain, unknown about the conflict. I think the um general public may just be wondering right now, Philip, how their expenses or outlays are going to change uh when there is a shock to the budget such as an Iran war that's lasting a little bit longer than already initially projected. In other words, will our taxes increase? Um will there be cuts to social programs that have already been budgeted? Any changes to our, you know, regular life besides inflation, which we'll talk about? >> Uh okay. Yeah, it's um you know again it will depend on the nature of the ultimate you know the ultimate nature of the conflict um you know if the conflict um ends relatively soon and in you know within a few months uh and energy prices go back to where they were before the conflict well then you know they're not likely to be um you know a huge uh impact they would be long you know looking back in retrospect Um it's just hard to know what um you know what the impacts will be because it it depends so much on the um you know the outcomes and the duration and scope of the conflict. So when it comes to inflation, you told me last time on the show deficits can cause inflation, but it depends on the interaction with monetary policy. So, with gasoline prices going through the roof, with diesel now seeing a new crisis at just under $5 a gallon, uh what do you think should be the calculus for the Federal Reserve right now? >> Okay. Yeah, it's something that we're watching uh and obviously the Fed is as well is how much does the energy shock that you know we're all seeing and that you just mentioned um in this transmit through to broader measures of inflation. Uh and again if that you know if the shock is relatively short-lived uh energy prices revert back to where they were before the conflict then that you know of course it affects families and affects budgets you know household budgets but is not a long-lasting effect on the economy or on inflation. Um if the conflict is longerlasting and the impact on energy prices is um you know is longlasting well then that affects inflation and eventually it'll uh broaden out from you know from the energy into into broader uh measures of inflation. It's just we're still at the early stages of uh of this. So it's still just hard to know. >> Let's show the audience uh the projection here from the >> Oh, very good. Yeah. Thank you. from the uh this is the statement on um the publication of our budget outlook. Yeah, thank you. >> Absolutely. So last uh well when I had you on in 2024, the fiscal year 2024 deficit was roughly 1.83 trillion. Um and the CBO now projects 1.9 trillion for fiscal year 2026. Um is it fair to say that not a lot has changed in terms of outlays and uh receipts >> from 2024 to now? It's interesting and right it's kind of where you started with the changes since you and I last talked. >> Yeah. >> There's a lot that's happened. I mean um right we have a new uh administration. I mean President Trump's second term. >> That's right. >> There have been large uh tariffs put on. There is a a very large reconciliation bill passed. The president signed into law on July 4th of last year. Um so there's huge changes. It changed outlays. It changed revenues. Um and yet there's some things that are the same. The fiscal deficit is still large, still around you nearly$2 trillion dollars in our projections um for this year and rising. The debt to GDP where you started the show is also remains large and rising. So um yeah, that's what's that's in the nature of um of the the last year or two. There's big changes but netting a lot of these things out the overall fiscal trajectory remains in qualitative qualitatively similar. >> How have tariffs changed government receipts? Uh the claim is that uh the deficit was narrowed somewhat by higher tariff revenues. Is that true according to your numbers? >> Yeah, that's right. So, in our um February 2026 baseline projections, we had the tariffs reducing deficits by $3 trillion over the 10-year budget window. Um, as com as by way of comparison, the 2025 reconciliation act increased deficits by 4.7 trillion. So the tariffs did not, you know, exactly offset the entire cost of um of the 25 reconciliation act, but a good chunk of it. Um so they did raise revenue. you know, the Supreme Court decision um I guess is is what three weeks ago now as we talk um >> uh eliminated some of the tariffs, the ones that were passed by the AIPA uh the Emergency Economic Powers um act um and we calculated that that would increase the deficit by about$ two trillion dollars. So the elimination of those tariffs. Now, the administration has, you know, since taken other actions. They've put on a a 10% tariff using other authority. They've talked about changing that, you know, from 10 to 15. Um, and we're still analyzing that. But, um, for sure the changes in tariffs have large impacts on revenues and therefore on the budget deficit and also on the economy. Are you in your um office assuming then that if tariffs were struck down by the Supreme Court, there wouldn't be any changes to economic activity, in other words, more spending um I guess uh more demand because tariffs are no longer in place, thereby increasing government taxation revenue uh simply from more economic activity, not so much from tariffs being collected. Is that is that the assumption here? >> Right. From the other activity. No, no, it's a good point that the tariffs of this size have macroeconomic effects um putting them on or taking them off. Um and in our budget baseline, we did look at that at those um instances that the the macro feedbacks between the tax polar policy and the macro um and we discussed it in the in the outlook. We haven't done that yet for the Supreme Court decision or the subsequent uh administration actions. Um and we will in a sense we need to wait for the um the administration's actions to settle down and for us to get a sense of where um you know where the eventual tariff policies will um will end up. But it could have a macroeconomic um uh feedback. Absolutely. Generally, how does a CBO make economic projections for GDP or growth if that's something that's uh within your domain? Because ultimately, you do have to project how the economy will grow in order to roughly estimate or um or speculate as to how much tax receipts will grow proportionally to uh spending. >> Oh, okay. No, very good. I just I'm I'm smiling um at the you know estimate speculate the word we use we use project that we project but estimate yeah estimate is fine and speculate I mean you know >> we don't speculate we don't we project all right >> yeah no no I totally understand the uh the the meaning there um uh yeah sometimes you know I I have to I catch myself before I use certain words so that's the word I catch myself before using you understand um so um no but Look, it's a challenge of the job is that exactly as you said, we have to have a projection for the economy in order to do our other projections of of outlays and revenues and revenue is natural, right? That that you know where the economy goes drives um the receipts that the federal government takes in. But there's also spending that is geared to the economy. If the economy is strong, well then the certain means uh spending that will be lower. There'll be fewer people unemployed. There will be fewer people um getting food. Yeah, what used to be called food stamps, now SNAP benefits, supp supplemental nutrition assistance program benefits. And so it the economy does matter and it matters both on the spending side and the revenue side. >> So that leads me to discuss the uh director's um statement which we showed earlier going down to this particular sentence here. Our budget projections continue to indicate that the fiscal trajectory is not sustainable. We discussed this in 2024. Um it seems like the CBO is doubling down on this view. Uh can you just elaborate more on why your view is not is that this is not sustainable? >> Yeah, if you scroll back up just a little bit to the debt Yeah. there to that chart. Just put that chart in view. It's that is the challenge. And this is the I mean this is a stocks. This is the the um debt held by the public as a share of GDP. And you can see it just keeps going and compare it to what happened in the 1940s. So you can see of course we had a you know World War II and um in the 1940s the debt rose as you know the US government borrowed. This is a you know sort of you know all these famous posters of um you know buy war bonds and then the debt was paid off in in large part by the generation that fought the war and now the greatest generation and now we see on the the right hand side of the screen the debt ratio. Exactly. Yeah. Thank you for your pointing. The debt ratio going up um and and not coming back down. Now that's under current law and it's one of the um uh you know one of the ways in which we construct our our estimates is current law. This is a stock but there flow measures associated with it interest payments or um uh you know other things that um you know would be very challenging at some point as the debt continues to rise. So this is unprecedented for the United States in terms of how far the debt to GDP uh will climb. However, we can look at other G7 nations perhaps at Japan as maybe a proxy to see how their economy performs under such high debt loads. Uh can we do that Philip? Is that fair to do? >> Yeah, I mean that would be one way of looking at it and as you said Japan has a you know also a high debt to GDP ratio. these other countries, Belgium, um, and some others. Um, you know, Japan's economic performance, well, it's still a rich country, of course, a very advanced country, but it has had decades now of slow growth. Um, and part of that is a demographic challenge in Japan, but the debt ratio is probably also an impediment to um to growth. Um, and so it gives us insight. you know the US is remains a special economy. I mean the the dollar has a special place in the world um economy and financial system. So we have some advantages. That's why you know we're continuing to um indicate that the debt is not sustainable. But it's not that there's a crisis tomorrow or the next day or anytime soon. It's what what what we mean is that action needs to be taken to to change the fiscal trajectory, but it's not it's not that it has to be done at any one moment. It just has to be done over time. >> So So when you when you warn that the fiscal fiscal trajectory is not sustainable, what does that mean practically speaking? I mean, we're not talking about a debt default, sovereign debt default, are we? >> No. I mean, no, absolutely not. And of course the US borrows in dollars and and the US government creates dollars. So uh you know eventually the unsustainable fiscal situation would show up as investor concerns about US securities that show up as higher interest rates or you know weaker dollar but more likely higher interest rates since the dollar has to be weaker against something. Um it could be higher inflation eventually. Um and so it's it's kind of things aspects of economic policy or economic developments that would undercut our prosperity, you know. So it's not and not like a sharp, you know, I'm chopping my hand. It's not like a sharp, you know, we fall off a cliff, but it'd be a slow undermining of our shared prosperity. If the government, if the central bank were to monetize the debt, meaning they were to create new money to purchase existing debt, uh would that solve the problem? >> I mean, it would result in high inflation, right? That would be um in some sense is almost like a form of a soft default, right? The US is paying back the debt but paying back in dollars that are worth less. Now, of course, we are, you know, way way way far away from that. Um and the you know the Treasury the Treasury Secretary has talked about reducing the deficit. He's talked about stronger growth 3% growth and a 3% um uh deficit. So um yeah, so that that's the policy of the administration is to take on this problem and um and that's you know that look that's that's what's needed and so that um you know that that's why we're I think we're still very far away from the kind of you know high inflation world. I think importantly the uh interest payments on this debt will rise and so your February 2026 outlook projects that net interest payments will rise from one trillion roughly 1 trillion this year to 2.1 trillion by 2036. Uh that's rising from 3.3% of GDP to 4.6%. In your monthly budget review, it shows interest costs rising already 8% year-over-year through February. So, at what point does these higher uh does this higher interest payment eat into other um government uh spending um programs such as Medicare, Medicaid, Social Security, and so on. >> Yeah. Yeah. I mean, that that that is really the challenge that you've put your finger on is that um the rising interest payments crowd out other priorities. um and and crowded in the sense of policy makers have to consider the overall fiscal picture um and dollars going to one thing can't go to another thing and so either we need you know lower spending on other things or higher taxes and more revenue and that's the way in which the um the figures uh you know the interest figures that you point to are a policy challenge. I I know it's not the um role of the CBO to actually enact policy and change legislation, but in the past, you've studied this a lot. What typically happens when interest payments go up as a percentage of GDP? Do we have historically have we seen higher taxes? Have we seen just cuts? >> You know, what changes? >> Ah. Oh, I see. Yeah, it's um that's a good question. I don't know if there's a historical precedent for what happens because it's really up to policy makers and the adjustment could be in either direction or in both. You know, it could be more revenue, it could be um lower spending, it could be some mix of that. Um and from CBO, we don't recommend particular solutions to policy makers. We don't say do this or do that but you know we just say some action needs to be taken and then we support the Congress as as they decide what to do. >> You have uh a forecast on real GDP growth as well which um I'm going to show on the screen in just a minute. It assumes I guess I think a real percent uh yeah here we go a real GDP growth rate uh long run of 2% or just under yeah just under 2% 1.8% 8% um and you're assuming that uh your projections of economic growth incorporate a positive effect of generative AI on productivity growth amounting to an increase of about 10 basis points per year. A lot of people uh and members of Congress are concerned about the negative effects of AI on the labor market. Um, in your projections, have you accounted for uh the possibility of more layoffs and higher unemployment uh from the rise of AI uh thereby probably reducing consumer spending in demand or is that not a baseline projection for you? >> Ah, okay. No, it's a great question. Um, so as you say, there's going to be disruptions from AI and we're starting to see some of that in the labor market already. Um you know on the other hand there are potentially large gains um to productivity to incomes and to overall GDP. Um and that's the challenge is figuring out the the this is the mix of the gains and the disruptions and the relative the costs. So what what we've done so far is we've looked at the improvements to productivity in the activities that we already analyze and so this is the like coders or programmers as people my age would call it um right it increases their productivity we we have that already in some of our internal activities the use of AI has increased our internal productivity and so that's the basis for the 10 basis point uh increase in productivity then there's the changes and disruption and opportunities and there's going to be new um you know new jobs and new occupations and things that we don't even contemplate. I mean who who would have thought of a podcaster 30 years ago, right? I mean there's radio shows and now like news radios are shutting down and podcasters are taking over. So um yeah, so we're watching that. We know there's gonna be both positives and disruptions, but we don't have and so we just don't have a basis yet for um for that. And so that's something that CV will be watching uh in the future. >> Yeah. Podcasters taking over radio. Uh in the future, you'll probably be talking to a robot instead of a real person. We'll see what kinds of questions. >> Yeah. I mean, I you know, look, I'm I'm positive. I'm pretty optimistic about the economy. Yeah. um in you know recognizing the disruptions but I you know AI is making us more productive and that's what I would see right for your like your research >> you'll have an AI agent helping you with your research and identifying questions you still need to use your judgment okay what's the right question and what you know what's the followup and it's the same thing where you know we're trying to figure out how to use this best >> uh we have uh a few minutes left so before we close off let me just ask you uh how you think the budget may uh change or sorry let me rephrase that question. What milestones or markers in the economy would move your budget projections either way uh either a reduction in the deficit >> or uh or higher deficits into 2027. >> Oh, okay. Okay. No, no, very good. That's a great question. All right. So, let me just tick off a couple things we're watching. One is what happens with tariffs. um right we had the Supreme Court decision. The administration has responded in part already and now is undertaking a number of investigations based on their tar tariff authorities. And so we're watching those to see where those go, what those mean for the economy, what those mean for revenues. So that's one thing is looking at uh revenues. The president will put out a budget at some point uh later this spring. Um we're watching for that. We're watching for any um uh supplementals like you mentioned earlier for um to fund the conflict in uh in Iran um or with with Iran. Um and then we're watching growth in productivity including the positive effects of the 2025 tax act uh well reconciliation act on the economy and in particular the tax provisions. Right? So the 25 act extended the lower taxes from the 20 December 2017 tax act. Those have a positive effect on investment and then from there to growth and employment. We have a pretty optimistic view of of those but there are some people who think that we're not optimistic enough and we're watching. We're trying to distill well what is the effect of the 2025 act on the economy on investment on job creation and then you know compare that to our projections and so those are that's another big milestone that will play out this year >> my final question and maybe you can answer this in one minute or less the projections that the CBO have uh put out have caused a lot of concern in the economic community um this is just an expost that I saw today uh negative numbers exclude social security and Medicare. CBO projects um add another 50 to 70 trillion in unfunded obligations over the la over the next 30 years. Um economists like Steve Hanky and David Walker, Steve Hank is a regular my program wrote unfortunately on March 23rd that these numbers would constitute insolveny under any standard accounting framework. Can you just make a statement to the general public on uh basically reacting to this kind of sentiment which is very common place amongst economists looking at the numbers that the CBO have released. Okay. Well, so first of all, I would follow the Treasury and I would not use that word. Um I the fiscal trajectory is challenging. It's daunting. It's unsustainable. >> Markets clearly believe that we as a nation will take action to address this challenge. And the Treasury, the Treasury Secretary has talked about taking action. And that's what I that's what I look to. um they have this is the the the targets that would make a meaningful adjustment in our situation. Um and markets implicitly markets believe that we as a nation will take action to address this uh this challenge because you know you look at financial markets and the you know the the dollar remains the number one currency in the world. at the US Treasury funds our our deficits investors have confidence in the US we continue to grow and create jobs so um you know so that's why I think with challenging daunting but um you know I remain optimistic okay thank you very much Philip and I encourage everybody to check out the CBO's projections links down below uh you can look at their projections and um and any changes in detail it's beyond the scope of a 25minut conversation today but thank Thank you so much, Philip, for lending us your time and and informing the public. I appreciate it. Thank you. >> Yeah. Thanks, dude. Pleasure. >> Okay. >> Thank you for watching. Don't forget to like, subscribe. Take care.