U.S. deficit to expand by about $800 billion more than previously expected over 10 years, CBO says – The Washington Post

August 21 at 11:00 AM

America’s federal deficit will expand by about $800 billion more than previously expected over 10 years, primarily because of two legislative packages approved this year, pushing the nation further into levels of debt unseen since the end of World War II, the Congressional Budget Office said Wednesday.

The CBO also said that the impact of higher trade barriers, primarily President Trump’s trade war, could hurt economic growth amid widespread fears of a recession.

The United States was already expected to hit about $1 trillion in annual deficits next year, an unusually high number, particularly given that deficits normally contract during sustained periods of economic growth.

But that shortfall will expand by $1.9 trillion in new spending over the next decade because of a budget deal to avoid the spending cliff reached by congressional Democrats and Trump and an emergency spending package for the crisis at the U.S.-Mexico border.

Those budget increases will be partially offset by lower spending than projected because of cuts to interest rates, which along with other changes to the CBO’s forecasts reduce the deficit by more than $1 trillion over the next decade.

The new revisions reflect changes from the CBO report in May, before the budget deal or emergency aid package were passed.

The CBO report is likely to intensify concerns that the United States does not have enough fiscal space to stimulate the new economy to avoid a recession — such as the payroll tax cut recently floated by the president — although many economists say those fears are overblown.

“Deficits are now expected to be larger than previously projected,” the CBO report states. “To put [debt] on a sustainable course lawmakers will have to make significant changes to tax and spending policies.”

Falling interest rates could significantly reduce the cost of financing new government spending, particularly if Congress and the administration seek new spending measures to stimulate the economy amid a downturn.

The CBO report said that it is dramatically slashing its expectations for net interest costs, dropping its projections for interest rate costs by nearly 100 basis points, or close to 30 percent. In July, the Federal Reserve reduced the benchmark interest rate for the first time in a decade but left confusing signals about what it would do next.

Still, deficit hawks warned that the new CBO report illustrated the need for immediate action to close the nation’s fiscal imbalance to avert severe consequences.

“We all know we are already on a troubling fiscal path, but today’s CBO report shows us that our leaders are making things considerably worse,” said Michael A. Peterson, chief executive of the Peter G. Peterson Foundation, which pushes lower deficits.

Some experts warned that U.S. policymakers should not interpret the growing deficit as evidence that they cannot spend more in an emergency. The major constraint on a temporary new spending package is lawmakers’ perception of what they can spend, not a fixed limit on new spending, said Jared Bernstein, who served as an economic policy adviser to Joe Biden when he was vice president.

“That couldn’t be more wrong,” Bernstein said of the idea that the report should cow lawmakers from acting in the event of a downturn. “Of the many things that keep me up in night, that’s in the top 5.”

The expanding shortfall is driven largely by falling tax revenue, which is occurring in part because of the 2017 Republican tax law signed by Trump that slashed rates for corporations and individual earners. In 2016, the CBO projected revenue would equal about 18 percent of the United States’ economy by 2018 and 2019, a number now down to 16.5 percent and projected to remain at roughly that level, according to the latest CBO estimates.

The United States is an unusually low tax country for one with an advanced economy, with only five other developed nations seeing lower levels of tax revenue relative to the size of their economy. On average, advanced economies collect about 36 percent of their gross domestic product in tax revenue, according to the Tax Policy Center, a nonpartisan think tank.

CBO also said higher trade barriers would shave about 0.3 percent of the nation’s gross domestic product by 2020, warning that it could hurt economic growth amid widespread fears of a recession. CBO also has projected an additional $400 billion in revenue through customs duties largely because of Trump’s trade war, although that number does not include the impact of decreased growth on new revenue.

The budget deal reached by Trump and congressional Democrats will add $1.7 trillion to the deficit over 10 years, while the emergency supplemental package for the border will add $255 billion, according to the CBO, a nonpartisan agency. It was the first time the agency has scored either package.

By the end of next decade, the United States’ federal debt will approximately equal the entire nation’s economy or GDP.

Comments

Write a Reply or Comment:

Your email address will not be published.*