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U.S. Budget Deficit to Widen for First Time Since 2009

CBO projections show gaps growing in each of the coming 10 years

The Congressional Budget Office on Tuesday said the budget deficit for the current fiscal year will climb to $544 billion, or 2.9% of gross domestic product. Photo: Andrew Harrer/Bloomberg News

WASHINGTON—Last month’s frenzy of deal-making by Congress and the White House on spending and taxes will send deficits widening this year for the first time since 2009, the Congressional Budget Office said Tuesday.


Deficits will also widen because economic growth has been lower than expected, tamping down forecasts for how much revenue the government will collect.


The CBO said the budget deficit will climb to $544 billion, or 2.9% of gross domestic product, for the current fiscal year, which ends Sept. 30. That is up from the $439 billion deficit recorded last year, or 2.5% of GDP, which had been the lowest since 2007.


The projections also show deficits rising as a share of GDP in every year after 2018. Cumulative deficits over the next decade are expected to run around $1.5 trillion higher than projected last year. Half of that increase results from last year’s budget and tax agreements. The remainder stems from downward economic revisions and technical changes.


The deficit’s increase for the current year is overstated somewhat by a quirk in the calendar. Because Oct. 1, which is the first day of the fiscal year, falls on a weekend, payments that would ordinarily be made in 2017 will instead occur in 2016. After accounting for the shift, the deficit this year would rise to $500 billion, or 2.7% of GDP.


Deficits could widen further if growth slows this year. The CBO, like many professional forecasters, has consistently overestimated economic growth. This year, it sees the economy expanding 2.7%, followed by 2.5% growth next year, up from 2% growth last year. It also projects that the unemployment rate will fall to 4.5% at the end of this year from its current level of 5%.


Congress agreed to cut spending in 2011 after running big deficits following the financial crisis in 2008. After lawmakers failed to agree on a package of long-term deficit reduction in 2011, a series of additional automatic spending cuts known as the “sequester” took effect in 2013.


Last year’s budget agreement boosted spending by rolling back part of the sequester for the current fiscal year and for the one after that. The deal followed a similar two-year agreement for 2013 and 2014.


Separately, Congress also agreed in December to make permanent a series of tax credits that it had been renewing annually.


Primarily due to the tax and budget deals, the CBO said its deficit projection for the current year is now about $130 billion larger than it had forecast last August.


The report underscored the lingering damage from the 2007-9 recession, and how the aftermath will constrain whoever wins the White House in November. The CBO estimated that GDP in 10 years will be 3% lower than it had forecast last August because the agency revised down its forecast of labor productivity growth.


Spending on public benefit programs such as Social Security and Medicare will drive deficits that are projected to swell larger next decade.


As a result, discretionary spending as a share of GDP is projected to fall to 5.2% by 2026, from 6.5% today. That would represent the smallest percentage since at least 1962, the first year for which comparable data is available.


The CBO report also said it expects payroll tax receipts to decline slightly as a share of the economy because of an increase in wages for the highest earning Americans. Currently, income of more than $118,500 isn’t subject to payroll taxes.


This bleaker near-term fiscal outlook will inevitably complicate ambitious tax cut plans for Republican presidential candidates and spending proposals from Democratic hopefuls.


For example, the CBO expects the government to spend $51 trillion over the coming decade. Democratic presidential candidate Bernie Sanders has proposed a universal health-care plan that would cost $14 trillion. The CBO also projects the government to collect $42 trillion in revenue over the coming decade, and Republican Donald Trump’s tax cut proposal carries an estimated price tag of $9.5 trillion, according to the Tax Policy Center, a project of the Brookings Institution and the Urban Institute.


Shrinking deficits and ultralow interest rates have sapped urgency in recent years for a “grand bargain” to rein in spending on public benefit programs. Tuesday’s report showed how much lower interest rates have helped the nation’s fiscal outlook.


While the nation’s publicly held debt has nearly doubled to around 74% of its GDP since 2007, interest payments as a share of GDP fell over that period. Debt funding costs are expected to remain at 1.4% of GDP this year, well below a 50-year average of 2%.


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