US deficit to balloon beyond US$1t by 2020, CBO says

US Capitol seen shortly after beginning of the Government shutdown in Washington January 20, 2018. — Reuters pic
US Capitol seen shortly after beginning of the Government shutdown in Washington January 20, 2018. — Reuters pic

WASHINGTON, April 10 — The US budget deficit will surpass US$1 trillion (RM3.86 trillion) by 2020, two years sooner than previously estimated, as tax cuts and spending increases signed by President Donald Trump do little to boost long-term economic growth, according to the Congressional Budget Office.

Spending will exceed revenue by US$804 billion in the fiscal year through September, jumping from a projected US$563 billion shortfall forecast in June, the non-partisan arm of Congress said in a report yesterday. In fiscal 2019, the deficit will reach US$981 billion, compared with an earlier projection of US$689 billion.

The nation’s budget gap was only set to surpass the trillion-dollar level in fiscal 2022 under CBO’s report last June.

Deficits are growing as the Trump administration enacted a tax overhaul this year that will lower federal revenue and Congress approved a roughly US$300 billion spending increase. The fresh CBO estimates could heighten investor worries as they weigh the potential impact that tariff threats between the US and China may have on the world economy.

New projections

The report includes new projections for the effects of the tax legislation — saying it will increase the deficit by almost US$1.9 trillion over the next 11 years, when accounting for its macroeconomic effects and increased debt-service costs.

In December, Congress’s Joint Committee on Taxation had said the tax package would reduce federal revenue by almost US$1.1 trillion over a 10-year period.

“Today’s CBO report confirms that major damage was done to our fiscal outlook in just the past few months,” Michael Peterson, who heads the budget watchdog Peterson Foundation, said in a statement. “This is the first forecast to take into account the recent tax and spending legislation, and it’s clear that lawmakers have added significantly more debt on top of an already unsustainable trajectory.”

The CBO forecasts that real gross domestic product will expand by 3.3 per cent in the 2018 calendar year, before slowing to 2.4 per cent in 2019 and 1.8 per cent in 2020, based on the fourth quarter year-over-year figure. In June, CBO forecast 2 per cent growth this year. The Trump 2019 budget request assumed that tax cuts would propel the economy to 3.1 per cent growth this year and remain above 3 per cent through 2024.

The tax-cut and spending legislation “provide fiscal stimulus, raising real GDP more than potential GDP in the near term,” the CBO said. “Over the longer term, all of those effects, as well as the larger federal budget deficits resulting from the new laws, exert upward pressure on interest rates and prices.”

Jobs, rates

The CBO predicts the federal funds rate will reach 2.4 percent in the fourth quarter of 2018, 3.4 per cent by the end of next year and then peak at 4 per cent in 2021. It sees unemployment declining to 3.3 per cent in 2019 on an annual average, from 3.8 per cent this year.

“During the 2020-2026 period, a number of factors dampen economic growth: higher interest rates and prices, slower growth in federal outlays, and the expiration of reductions in personal income tax rates,” CBO said.

US debt held by the public will surpass US$20 trillion by fiscal 2022, up from US$15.7 trillion this year, according to the CBO.

Even larger

Even before the latest fiscal measures, the US budget gap was predicted to increase as an aging American population puts pressure on health care and retirement programmes.

The CBO baseline represents what it projects will happen if current law is allowed to remain in effect. CBO assumes that budget caps on annual appropriations, which Congress has raised regularly, remain in effect. Because of that, deficits are likely to be even larger than CBO is projecting.

CBO Director Keith Hall will testify about the report this week before the House and Senate budget committees.

Congress isn’t planning to enact any major deficit-cutting legislation before the November midterm elections. While the House will draft a budget resolution, the Senate has indicated it won’t take one up. Without the fast-track budget reconciliation, there is no chance entitlement cuts conservative Republicans are seeking can be enacted because Democrats can employ a Senate filibuster. — Bloomberg

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