Budget Busters

Yesterday, the nonpartisan Congress Budget Office (CBO) published its estimates (based on data from the Daily Treasury Statements) of the federal budget deficit in May 2016 and in the first eight months of fiscal year 2016 (October 2015 through September 2016). If projections stay on track, 2016 will be the first year since 2009 that the deficit as a share of GDP will increase from the previous year.

Here are some takeaways from the CBO:

  • The federal budget deficit was $408 billion for the first eight months of fiscal year 2016.
  • This is $41 billion more than the shortfall recorded during the same period last year.
  • The deficit for the full fiscal year is on track to hit the CBO’s estimate of $534 billion (2.9%) of U.S. gross domestic product (GDP).
  • This estimate is higher than the 2015 deficit of $438 billion, or 2.5% of GDP, marking the first time since 2009 that the deficit as a share of GDP increased from the prior year. Six consecutive years of deficit reductions as a percent of GDP is the second longest streak since the start of the historical record in 1929, behind only Bill Clinton’s eight years, a record that can’t be broken unless we change the Constitution.

Now that we’ve seen the first increase in seven years, what’s ahead? Looking over the next 10 years, the CBO sees the deficit continuing to move higher as a share of GDP and hitting 4.9% by 2026, after staying around 3% until the end of the decade. The CBO’s forecasts assume that current laws impacting taxes and spending remain in place through 2026, and that the economy does not enter a recession.

Looking way ahead, the projects are for the deficit to keep going up. The CBO’s latest long-run projections (back in June 2015) for the budget and debt puts the deficit in 2090 at 9.5% of GDP and the public debt-to-GDP ratio, which currently stands at around 74%, at 181%. The key drivers of the increased debt-to-GDP ratio are the demographically driven increase in spending on Medicare, Medicaid, and Social Security, which are roughly 10% of GDP today and are expected to double as a share of GDP (to 20%) by 2090, absent any changes in policy.

We have not heard much from the two presumptive nominees for president on budget issues. Although some type of infrastructure spending and tax reform bill has a decent chance of passing into law in 2017, the difficult decisions needed to properly address the structural issues in the budget are not likely to be made until a crisis is at hand.

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The economic forecasts set forth in the presentation may not develop as predicted.

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