The Congressional Budget Office , or CBO, released its February 2023 budget and economic outlook last week. The February release was the first baseline adjustment since May 2022.

The CBO’s new projections show that the deficit outlook is deteriorating at a rapid rate. The CBO estimates that deficits will average $2 trillion per year, or about 6.1% of GDP, over each of the next 10 years.

The CBO sees the deficit at 107% of GDP by the end of fiscal 2028, which is just over 5 1/2 years away. The CBO also projects that the deficit will reach 118% of the GDP in less than 10 years. What is most disturbing is that the new February projections are significantly worse than CBO’s May 2022 projections. In May 2022, the CBO saw the deficit reaching 110% of GDP by 2032.

In the space of nine months, the deficit picture has worsened by 8% of GDP, over $2 trillion in today’s dollars. Deficit projections increased principally because interest rates increased more than expected. Consequently, the cost to service the debt increased. Because the federal deficit held by the public approaches 100% of GDP, each 1% increase in the cost of borrowing by the federal government raises debt service costs by 1% of GDP.

The CBO's latest projections are already out of date. The CBO remains too optimistic. Over the past few weeks, economic data show that the economy is stronger than expected, that inflation is higher than expected, and that wage inflation remains elevated.

Governors of the Federal Reserve, major investment banks, and informed commentators say that the Federal Reserve must have a more aggressive rate-setting policy to bring inflation down to the Federal Reserve’s 2% target. The Federal Reserve must slow the economy to reduce inflation. The CBO assumes that short-term interest rates will average around 4% over the next two years.

That would have been a justifiable assumption just a month ago, but now, with inflation sticky and wage gains elevated, the 4% projection is too low, perhaps by as much as 2 percentage points. The three-month Treasury bill interest rate is currently 4.7%. The Federal Reserve’s target interest rate is 4.75%. If the Federal Reserve is forced to raise interest rates by another 1% or more, the cost to service the debt will rise by an equivalent percent of GDP.

To make matters worse, demographics dictate that more of the GDP will be devoted to healthcare. Productivity growth in the healthcare sector approaches zero . As healthcare consumes a greater proportion of GDP, productivity growth slows. The latest projection by the CBO does not account for slowing productivity. The CBO sees productivity growth as stable at around 1.4% a year. As healthcare consumes more of the economy, both productivity and real GDP growth will slow. The CBO is too optimistic about long-term economic growth.

The latest projections by the CBO do not assume a recession. The risk of recession is high. If a recession occurs, the deficit will increase. Tax receipts fall because fewer people are working and paying taxes and business will be less profitable; therefore, corporate taxes will be lower. Government spending rises in a recession.

The deficit picture is dark and getting darker.

James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.