CBO: Massive Budget Deficits Pose “Significant Risk” to Economy
The CBO projects the federal government will run massive budget deficits into the foreseeable future and says the ballooning nationals debt poses “significant risk” to the economy and financial system.
According to the CBO, the federal budget shortfall will hit $1.02 trillion in FY 2020 and rise into the foreseeable future. Deficits will average $1.3 trillion per year between 2021 and 2030 and top $1.5 trillion by the end of the decade. The CBO projects cumulative deficits over the next decade to total $13.1 trillion.
The budget deficit has only topped $1 trillion four times in US history, all in the years following the 2008 financial crisis.
According to the report, projected deficits will rise from 4.6% of GDP in 2020 to 5.4% in 2030. To put that into perspective, the CBO tells us:
Other than a six-year period during and immediately after World War II, the deficit over the past century has not exceeded 4.0% for more than five consecutive years. And during the past 50 years, deficits have averaged 1.5% of GDP when the economy was relatively strong (as it is now).”
With these projected deficits, the national debt will spiral up to $34.4 trillion by 2030. Debt held by the public will represent 81% of GDP this year and is projected to reach 98% by 2030. Extending projections out to 2050, the CBO says debt would be 180% of GDP—far higher than it has ever been.
To put that into perspective, last February, the national debt topped $22 trillion. When President Trump took office in January 2017, the debt was at $19.95 trillion. That represented a $2.06 trillion increase in the debt in just over two years. The borrowing pace continues to accelerate. The Treasury borrowed $800 billion through just two months late last summer. (If you’re wondering how the debt can grow by a larger number than the annual deficit, economist Mark Brandly explains here.)
Uncle Sam will run a massive budget deficit this year despite relatively healthy economic growth, at least according to CBO projections. The report predicts 2.2% GDP growth for the fiscal year, primarily due to strong consumer spending.
CBO projections tend toward the conservative side and assume no changes in current spending and tax law. The 2020 deficit projection represents an $8 billion increase from the CBO’s August estimates.
There are some signs that consumers may be close to being tapped out. Americans have sustained the bubble economy by spending money they don’t have. Consumer debt has set new records month after month. But the rise in debt has slowed in recent months and could signal that American consumers are getting close to their credit card limits.
In other words, the CBO may well be overestimating the potential for economic growth.
Regardless, these are the kind of budget deficits one would expect to see during a major economic downturn. The deficit peaked in 2009 at $1.4 trillion as the government enacted emergency measures to cope with the 2008 financial crisis. Uncle Sam is approaching these deficit levels despite having what Trump keeps calling “the greatest economy in the history of America.”
Generally, during economic expansions, government spending on social programs shrinks and tax revenues climb with increased economic activity. Revenues have increased over the last year, even with the Republican tax cuts, but they haven’t kept pace with the increase in government spending.
Through the first three months of the current fiscal year, the deficit ballooned to $356.6 billion. That was an 11.8% increase from a year ago. In just three months, Uncle Sam blew through $1.16 trillion. Spending through the first three months of FY2020 is up 6.5% over the spending through the first three months of fiscal 2019. According to the CBO, federal outlays are projected to rise from $4.6 trillion in 2020 to $7.5 trillion in 2030.
The CBO report says the projected increase in debt poses “significant risks to the fiscal and economic outlook, although those risks are not currently apparent in financial markets.” It says the growing deficits could affect the economy in two significant ways.
- That growing debt would dampen economic output over time, and
- Rising interest costs associated with that debt would increase interest payments to foreign debt holders and thus reduce the income of US households by increasing amounts.
The reality is America’s fiscal condition is circling the drain. The bottom line is that the spending trajectory is unsustainable. If the US government is running $1 trillion deficits now, what will the country’s financial situation look like when the next recession hits?
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