2026 Update: What Drives Our Long-Term Budget Deficit?

Unpacking the Real Sources of America’s Fiscal Imbalance

Last year I published a post titled “What Drives Our Long-Term Budget Deficit?” in which I estimated that 71% percent of the FY2025 budget deficit was the result of spending policy decisions, and 29% was due to tax policy decisions. For the long-term structural gap, I estimated that spending growth was driving 100% of the long-term deficit.

With the recent release of the Congressional Budget Office’s (CBO’s) long-term budget projections, I can now re-estimate what drives our budget deficits, accounting for the long-term impact of the One Big Beautiful Bill Act (OBBBA) and other policy changes.

The budget deficit is forecasted to increase significantly, reaching 9% of GDP by 2055. Meanwhile, debt held by the public is projected to reach its highest level ever in 2029 and continue to grow to 172% by 2055. In other words, our fiscal condition is already dire, and it is going to get significantly worse in the coming years and decades. This raises the question, “How did we get here?”

Let’s start by looking at our current (FY2026) budget deficit. The CBO currently projects that this year federal outlays will total 23.3% of GDP, while revenues will come in at 17.5%. These projections are comparable to historical averages (1962–2025) of 20.6% and 17.3% respectively.

Since spending today is significantly above historical averages, it’s worth taking a closer look at how federal outlays have trended over time. Figure 1 below shows the growth and composition of federal outlays over time—while discretionary spending as a share of GDP has declined, it has been outpaced by significant growth in mandatory spending. Mandatory spending as a share of the economy almost doubled in the decade after 1965 with the launch of the Great Society and has been on an upward trajectory since 2007.

According to budgetary data over time, both outlays and revenues have fluctuated as a share of GDP. Figure 2 below plots this data along with historical averages to indicate whether our current budget shortfall is rooted in too few tax revenues or too much spending. Here I adopt the methodology of Charles Blahous from his 2013 budgetary analysis. Plotting the midpoint between historic revenues and outlays establishes a neutral budget balance point. If one assumes that a share of revenue increases plus an equal share of spending reductions is needed to close the deficit, then the neutral budget balance point is 19% percent of GDP based on historical trends.

Given that current federal outlays are 4.3 percentage points above the neutral budget point and current revenues are 1.5 percentage points below it, we can attribute 74% of the FY2026 deficit to spending policy decisions and 26% to tax policy decisions. Figure 3 below breaks this out further by showing that most of this spending growth is rooted in mandatory spending, with the remainder in higher net interest spending.

It seems that our current deficit problem is primarily rooted in spending growth (specifically mandatory spending growth), while a shortfall in tax revenues has played a smaller but still notable role in driving our current deficit.

Next, we can use the same method to measure whether spending or tax policy decisions contribute to the nation’s future fiscal imbalance. With the recent release of the CBO’s long-term projections, we can use 2055 as a proxy for the government’s long-term structural fiscal gap.

Under current CBO projections, federal outlays will reach 27.7% of GDP in 2055, far higher than historical averages, while federal revenues will reach 18.8%, also higher than historical averages (but below the neutral budget balance point). Figure 4 below shows the factors that contribute to the government’s long-term fiscal gap.

As federal revenues are forecasted to be notably higher than the point of neutral budget balance by 2055, 98% of the long-term structural deficit can be attributed to spending policy decisions, while just 2% is attributed to tax policy. Specifically, 67% of the long-term structural deficit is attributed to growth in net interest payments on the debt, while the remaining 31% is attributed to growth in mandatory spending programs. Breaking this down further, the most significant driver of long-term mandatory spending is Medicare.

While revenue shortfalls play a role (albeit smaller) in our current fiscal shortfalls, the nation’s long-term structural deficit is driven almost entirely by unsustainable growth in mandatory spending programs. The entitlement program that deviates furthest from sustainable levels is Medicare, which will grow to 5.4% of GDP by 2055 (from a historical average of just 2.2%).

Going back to the question of “How did we get here?” budget projections and historical data point decisively to the structural growth of mandatory federal obligations, particularly those serving aging populations. Policymakers who are serious about tackling this issue will have to confront the politically difficult, but economically essential, task of slowing the growth of these programs.