The Congressional Budget Office (CBO) released a new budget and economic outlook, updating previous outlooks published in January and May. The report confirms what budget watchers have known for a while: CBO's deficit projections have been too low. Despite everybody knowing that lawmakers were going to bust through the remaining spending caps set in the Budget Control Act of 2011, CBO’s official projections couldn’t take that into account since they are based on current law. Among the findings:
Higher deficits: Primarily due to the passage of the Bipartisan Budget Act of 2019 (BBA 2019) that increased the statutory spending caps by $322 billion over two years, CBO now projects $890 billion higher deficits through 2029 relative to its May 2019 update.
Higher debt: Last January, CBO projected that federal debt would grow to $28.7 trillion in 2029, or 92.7 percent of GDP. The latest estimate sees it expanding to $29.3 trillion, or 95.1 percent of GDP.
Lower interest rates: CBO revised its projections of interest rates downward, thus reducing estimated outlays for financing the government's massive debt by $1.1 trillion compared to previous estimates.
Slower growth in GDP: CBO foresees GDP growth of 2.3 percent in 2019, unchanged from its forecast last January. CBO still expects that the economy will slow down after this year, averaging 1.8 percent through 2023 (a slight improvement from the 1.7 percent GDP growth CBO projected in January).
Tariffs slow the economy: CBO again warns that tariffs weaken GDP “by making consumer goods and investment goods (such as structures and equipment) more expensive.” The agency estimates that “the trade barriers imposed since January 2018 reduce the level of real (inflation-adjusted) U.S. gross domestic product (GDP) by about 0.1 percent and the level of real household income by 0.2 percent by 2029.”
Uncertainty: CBO stresses that the actual deficit could be different than its projection because of the nature of the current law baseline and due to unforeseen economic changes. For example, it projects that the debt will rise 88 percent of GDP in 2024. Accounting for the likelihood of alternative outcomes, CBO estimates that “there is approximately a two-thirds chance that, under current law, federal debt would be between 79 percent and 97 percent of GDP in that year.”
With the ongoing bipartisan talks since last year leading up to the massive spending hikes in the BBA of 2019, this higher deficit projection was anticipated. There are still policy proposals in the pipeline that could drive up the deficits even higher. Members are currently considering reviving several “tax extenders.” The Joint Committee on Taxation has estimated that making these items permanent would reduce tax revenues by over $90 billion through the decade. In addition, the President might revive a dropped plan for a temporary reduction in payroll taxes.
Members are also considering a transportation package and will need to provide funding for the recently enacted Veterans Choice program, though presumably both of these could be done within the higher spending levels allowed in the BBA 2019. There is also the possibility of an unforeseen natural disaster that could lead to emergency appropriations or an economic downturn that would trigger higher spending through welfare programs.
CBO’s numbers have caught up with the reality that the spending caps were never going to maintained, now it is time for lawmakers to confront the reality that they are spending beyond our means and get serious about fixing the budget.