US budget deficit to hit $1 trillion this year: CBO

For a while now, the United States government has been spending more money each year than it takes in. That is what economists call “deficit spending”. As all those deficits accumulate, it contributes to US national “debt”. At $23 trillion and counting, the US already has a whopper of one.

And it’s poised to get even bigger.

On Tuesday, the Congressional Budget Office (CBO) released its annual forecast for federal deficits, debt, spending and revenues, as well as the economic picture underlying them. It also released its view of what those figures would be for this year and a decade later.

The CBO is forecasting the federal budget deficit will hit $1 trillion in 2020 and $1.3 trillion every year afterward through 2030. Much of the rise reflects increased mandatory spending on Social Security and Medicare as the population ages. 

That gap between spending and revenues means that projected deficits as a percentage of gross domestic product (GDP) – the total value of goods and services produced by the economy – will rise from 4.6 percent of GDP this year to 5.4 percent in 2030.  

To put that into perspective, aside from the six-year period during and just after World War II, the annual deficit over the past century has not exceeded four percent of GDP for more than five consecutive years. Over the past 50 years, when the economy has been relatively strong – like it is now –  federal deficits have averaged 1.5 percent of GDP.

Thanks to the cumulative effect of all those deficits, the CBO sees US federal debt growing from 81 percent of GDP this year to 98 percent in 2030. That would be the highest percentage since 1946. If the CBO’s projections hold true, by 2030, US debt would be a blistering 180 percent of GDP. 

All that debt is not without consequences, warns the CBO. Rising interest payments to foreign debt holders could dampen economic growth, and reduce income for US households.

As for the underlying macro picture, the CBO sees the US economy growing 2.2 percent this year – well shy of the three percent growth targeted by President Donald Trump – and settling into an even lower growth trajectory from 2021 through 2030. The CBO expects GDP to average 1.7 percent annually.

The CBO sees US employment remaining at 50-year lows this year, before rising steadily as the economy slows. 

Of course, the CBO acknowledges that its crystal ball on the economy is not flawless. As the federal tax and spending policies change, it can alter the outlook. The same goes for changes in trade policies, productivity, labour force growth, international developments and, the CBO notes, “perhaps a recession”.