CBO projects booming deficits

This year’s federal budget deficit will rise to $804 billion and is projected to nearly hit $1 trillion in 2019, largely because of the GOP tax cuts and the bipartisan $1.3 trillion spending package approved last month, according to updated projections released Monday by the Congressional Budget Office (CBO).

The $804 billion deficit this year would be a $139 billion increase over 2017, with the total representing 4 percent of gross domestic product (GDP).

{mosads}In 2019, deficits would rise to $981 billion before peaking at 5.4 percent of GDP in 2022, according to the CBO’s “Budget and Economic Outlook” report.

Deficits would hover around 5 percent through the end of the decade.

The debt burden, the total amount the government owes relative to the size of the economy, is projected to reach 96 percent of GDP by the end of the decade, its highest level since the end of World War II, the report said.

Higher deficits could lead to ballooning debt interest payments, a drop in capital stock and productivity, decreased fiscal flexibility in the event of a downturn and higher chances for a fiscal crisis, the report said.

“Congress has got some tough decisions to make about how to deal with this problem,” CBO Director Keith Hall told reporters.

In the short run, however, the fiscal policies will boost the economy.

The CBO projected that real GDP will rise to 3.3 percent in 2018 before dropping below 2017 levels, to 2.4 percent, next year. The average growth over the entire decade is expected to remain moderate, at 1.9 percent.

The Trump administration has touted sustained 3 percent growth as a policy goal, so the CBO report could portend a slew of good economic headlines in the run-up to November’s midterm elections. But by the 2020 presidential election, growth is projected to slump to 1.8 percent, below levels seen in recent years.

Similarly, unemployment is projected to dip to 3.8 percent this year and 3.3 percent next year before popping back up to decadelong average of 4.8 percent.

The major drivers of the increased GDP growth were the GOP tax plan and the bipartisan spending increases approved by Congress. The CBO also attributed the 2018 boost, in part, to better-than-expected economic data from the second half of 2017.

“The largest effects on GDP over the decade stem from the tax act,” which will increase the overall economy by 0.7 percent by the end of 10 years and add 1.1 million jobs in the same period, according to the report.

But the CBO also found that the tax act would cost more than originally estimated between 2018 and 2028.

According to the report, the tax law would cost the government $2.3 trillion in revenues, but economic growth would offset that figure by about $461 billion.

Some Republicans argued vociferously during the tax debate that tax cuts in the bill would pay for themselves, with Treasury Secretary Steven Mnuchin going so far as to say that they would ultimately reduce the national debt and deficits.

Others estimated that a dynamic score of the tax law — one that incorporated macroeconomic effects — would reduce the $1.5 trillion cost of the tax cut down to roughly $1 trillion in added debt.

“The CBO’s latest report exposes the scam behind the rosy rhetoric from Republicans that their tax bill would pay for itself,” Senate Minority Leader Charles Schumer (D-N.Y.) said in a statement Monday.

He want on to decry a planned House vote this week on a balanced budget amendment as a “sham.”

One reason for the increase in the deficit projections for the tax law is the expectation that interest rates will rise faster than previously expected, which increases the costs of servicing the debt. The CBO projected that the federal funds rate would nearly double from its current level of 1.75 percent to 3.4 percent by the end of 2019, growing faster than the Federal Reserve’s own estimates.

In its 11-year estimate, the CBO estimated that interest payments would account for $582 billion of the $1.9 trillion total deficit increase from the tax law.

The combination of rising interest levels and higher debt levels means that the government will spend a larger percentage of its resources simply servicing debt. The CBO forecast that net interest payments on the debt would surpass both defense and nondefense spending by 2025.

Budget watchers and Democrats used the report to pillory current fiscal policy.

“Now, during a time of low unemployment and economic expansion, we should be taking reasonable steps to put our debt on a sustainable path — but instead we are piling up trillions of bills that will harm the next generation’s economic prospects and prosperity,” said Michael Peterson, president and CEO of the fiscally conservative Peter G. Peterson Foundation.

House Budget Committee Chairman Steve Womack (R-Ark.) laid the blame on the debt for mandatory spending, which largely falls outside the purview of the annual budgeting process.

“It is particularly sobering that mandatory spending continues to grow at such an unsustainable pace, making it even more difficult to achieve balance,” he said in a written statement.

House Minority Leader Nancy Pelosi (D-Calif.) accused Republicans of drumming up debt through tax policies that favor the rich and then using the debt as an excuse to take aim at entitlement programs such as Medicaid.

“The American people cannot afford Republicans’ fiscal hypocrisy and their relentless efforts to enrich the special interests on the backs of working families,” she said.

In addition to its baseline projections, the CBO also calculated an alternative scenario that incorporated several likely real-world policy outcomes that have not yet come to pass. In that scenario, lawmakers would not allow certain tax breaks to expire, the budget caps deal would extend past 2019 and the cost of disaster relief would not stay at the record level it hit in 2018.

Under those circumstances, the budget outlook grows worse, with deficits growing another cumulative $2.6 trillion over a decade, at which point the debt burden would hit 105 percent of GDP. 

The report does not include projections over how a trade war would affect the economy, though the CBO said it would include such projections if significant tariffs went into effect by the time it releases its next projection, expected later this year.

Updated at 5 p.m.