The U.S. budget deficit will balloon over the next few years mainly because of deep tax cuts approved in December by Republicans in the U.S. Congress and President Donald Trump, the nonpartisan Congressional Budget Office said on Monday. Between 2009 and 2012, budget deficits exceeded $1.0 trillion as the government was dealing with the Great Recession.
The new report said 10-year debt will now hit $12.4 trillion, after breaking the $1 trillion mark in 2020. Debt held by the public, which has doubled in the past 10 years as a percentage of gross domestic product (GDP), approaches 100 percent of GDP by 2028 in CBO's projections.
The government is slated to spend $4.1 trillion this year: $2.5 trillion of that on entitlements, $1.3 trillion on defense and domestic discretionary spending such as education and the environment, and $316 billion on interest payments on the debt.
The CBO's forecast shows the fiscal stimulus will lift growth rate in short term, but do little to boost economic prospect in longer term. It warns that interest rates on government borrowing will spike, with the benchmark 10-year Treasury note, now yielding 2.8 percent, will average a 3.0 percent interest rate this year and 3.7 percent next year. More speculatively, higher wages and less competition in the labor force could actually raise the fertility rate among Americans, ultimately contributing to a larger labor force than the CBO now expects. CBO attributes these economic trends to the three major laws mentioned above, along with rising federal budget deficits over the ten-year window.
The CBO notes in its report that, if the tax cuts for lower income people are renewed by Democrats in the mid 2020's then the fiscal outlook will be much darker. Economic growth from the tax cuts will add 0.7% on average to the nation's economic output over the coming decade, the analysis said, only partially offsetting the deficit cost of the tax cuts. "Most of this growth is driven by consumer spending and business investment, but federal spending also contributes a significant amount this year", Hall said. But in a sign that Republicans are growing concerned about the political liability of soaring deficits, the House will vote Thursday on a constitutional amendment to require balanced budgets.
Republican tax cuts are expected, as leadership has repeatedly claimed, to grow the economy over the next two years. While the benefits of tax reform should not be overlooked, including a projected high short-term GDP growth and low unemployment, the deficit and debt forecasts are daunting and need to be addressed.
If the Republicans really wanted to lock in their tax cuts, they needed spending restraint.