Trillion-Dollar Budget Deficits Are Coming Back: CBO

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BY JED GRAHAM, INVESTOR'S BUSINESS DAILY

06:07 PM E

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The federal budget deficit is back on the rise — by an expected $105 billion this year — the Congressional Budget Office said Tuesday, the first increase since fiscal 2009. Deficits topping $1 trillion will be back before you know it — three years sooner than expected.

The projected $544 billion deficit is also $130 billion bigger than the budget scorekeeper's estimate made in August. The CBO said the rise was primarily due to the year-end budget deal that extended, and in some cases expanded, corporate and individual tax cuts, as well as busting spending caps. The deficit-to-GDP ratio is expected to grow to 2.9% in fiscal 2016 from 2.5% last year. That would also be the first increase since 2009, with the trend getting worse in the years ahead.

From 2016 to 2025, the CBO expects cumulative deficits of $8.5 trillion — $1.5 trillion more than it predicted in August.

The news is jarring because of the deficit's steady retreat after hitting nearly 10% of GDP in President Obama's first year due to the deep recession and emergency spending in the financial crisis. In recent years, despite modest economic growth, the deficit has regularly come in smaller than the CBO expected.

Budget 'Complacency' Over?

Now, it seems that good budget news may be history, which may also mean that the days of deficit-increasing congressional deals are also at an end.

Receding deficits had fed "a sense of complacency in Washington over further borrowing," said Robert Bixby, executive director of The Concord Coalition, a fiscal watchdog group.

But the new projections "clearly demonstrate that recent legislation combined with the relentless fiscal pressures of an aging population add up to steadily rising debt from this point forward."

Legislation since August cut the 10-year revenue outlook by $425 billion, while boosting spending by $324 billion.

A few other factors also contributed to the worsening outlook. The CBO raised its cost projections for Medicaid due to higher-than-expected spending and enrollment for ObamaCare's expansion of the program. It also expects spending for veterans' disability compensation to jump. Lastly, the CBO said it now expects slower economic growth, which will add $437 billion to deficits.

Economic Forecasts Cut

The agency said its latest estimates call for real GDP to be nearly 3% lower than previously expected a decade from now amid slower productivity gains. The CBO now sees 2.7% GDP growth in 2016, down from its August estimate of 3.1%.

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The estimates were made before the latest data suggesting that the U.S. only grew about 1% in Q4 2015. The CBO expects three more quarter-point rate hikes from the Federal Reserve this year and four in 2017.

Trillion-dollar deficits are now expected to return in 2022 vs. 2025 in August's forecast. The deficit is projected to reach $1.4 trillion in 2026.

Those figures still assume that discretionary spending will fall from 6.5% of GDP in 2015 to just 5.2% in 2026. The deals to delay sequester spending curbs underscore how difficult that would be.

Meanwhile, mandatory spending, primarily on Medicare, Medicaid and Social Security, will rise from 12.9% of GDP to 15%. Interest outlays will more than double as a share of the economy, to 3% from 1.3%, amid higher debt levels and more normal interest rates. O utlays of 23.1% of GDP would exceed revenue of 18.2%, leaving a deficit equal to 4.9% of GDP in 2026.

Public debt as a share of GDP is expected to rise from 73.6% at the end of fiscal 2015 to 75.6% this year and 86.1% in 2026.

Changing the debt trajectory is critical because of what is forecast to happen beyond the next decade. Three decades from now, if current laws remain in place, the budget agency says debt would reach 155% of GDP.

"Such high and rising debt would have serious negative consequences for the budget and the nation," the CBO warned.

Read More At Investor's Business Daily: http://news.investors.com/politics-capital-hill/011916-790373-cbo-hikes-budget-deficit-forecast-for-2016-beyond.htm#ixzz3xjw1qVdQ
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