Deficit widens, economic growth slows in new CBO outlook

Repeal of health care taxes the largest driver of 10-year deficit increase, according to projections

UNITED STATES - JANUARY 23: Storm clouds pass over the dome of the U.S. Capitol building on Tuesday, Jan. 23, 2018. (Photo By Bill Clark/CQ Roll Call)
UNITED STATES - JANUARY 23: Storm clouds pass over the dome of the U.S. Capitol building on Tuesday, Jan. 23, 2018. (Photo By Bill Clark/CQ Roll Call)
Posted January 28, 2020 at 4:06pm

The Congressional Budget Office projects higher deficits for this year and the coming decade, with a fiscal 2020 deficit of $1.015 trillion — $8 billion higher than the agency estimated last August.

The fiscal 2019 deficit was $984 billion, by comparison.

Over the next decade, the cumulative deficit outlined in the agency’s latest budget and economic outlook is estimated at $12.4 trillion, $160 billion more than the earlier projection.

The largest factor in the 10-year deficit increase was the repeal of several health care taxes in fiscal 2020 appropriations legislation. The CBO said the repeals were among legislative changes that increased projected deficits by $505 billion.

[Swagel officially chosen for CBO director, replacing Hall]

Technical updates, including a $315 billion increase in projected Medicare spending, drove the deficit projection some more. But the agency said economic changes, including revising interest cost projections downward by $441 billion, offset some of the deficit increase, resulting in the net projected deficit expansion of $200 billion.

Under the new estimates, the deficit is projected to fall slightly to $1 trillion in fiscal 2021 and then commence a steady rise to $1.7 trillion in 2030.

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Speaking to reporters after the report’s release, CBO Director Phillip L. Swagel said despite the current strong economy, rising deficits show a “worrisome trajectory” for the budget. “Not since World War II has the country seen deficits during times of low unemployment that are as large as those that we project — nor, in the past century, has it experienced large deficits for as long as we project,” he said.

CBO has long warned that rising deficits and debt are “unsustainable” and may eventually lead to a “debt crisis.”

Swagel said no crisis is imminent. “We’re not saying that there’s an imminent, urgent problem,” he said. “The challenge is over time.”

If debt as a share of GDP is higher at some point decades in the future, he said investors could lose faith in the ability of the U.S. government to continue to manage the high deficits, leading to expectations of higher inflation and interest rates and resulting in a “more difficult fiscal situation.”

Swagel said slow growth in the rest of the world and the attractiveness of the United States as a place to invest have contributed to low interest rates, which in turn have reduced borrowing costs and therefore the growth of the deficit. He added that traders and other market participants should be confident that the U.S. will eventually address the rising debt, without knowing whether it would be through spending cuts, tax increases or a combination.

In its economic forecast, the CBO projects that gross domestic product will grow by 2.2 percent in calendar 2020, and at an average rate of 1.7 percent over the next decade. That represents a slowdown from 2.5 percent in 2018 and an estimated 2.4 percent this year, the agency said. The 2020 growth figure is slightly higher than what the CBO forecast in August, however.

The CBO said if current laws remain unchanged, the deficit as a share of GDP will rise from 4.6 percent in 2020 to 5.4 percent in 2030. Over the past 50 years, the deficit averaged 3 percent of GDP; however, during periods of relative economic strength, deficits were about half that size relative to the broader economy, the report says.

Debt held by the public, which excludes special government securities held by the Social Security and other trust funds, is projected to grow from 79 percent of GDP in fiscal 2019 to 98 percent in 2030, rising to 180 percent by 2050, the agency said.