Continued sluggish growth will keep the nation’s deficit above $1 trillion for the fourth consecutive year, the Congressional Budget Office said in its annual forecast Tuesday. And while the deficit next year begins to shrink, it will remain very large by historical standards, the study said.
The continued large deficits are being driven by historically low tax collections and an economy that continues to spin its wheels due to the prolonged slump in employment and economic growth rates that remain far below the economy’s capacity. The CBO projected the economy will grow just 2 percent this year and unemployment will actually rise to 8.9 percent.
While CBO did project a $217 billion reduction from last year’s deficit, the $3 trillion projected increase in the national debt over the next decade will drive net interest costs from 1.4 percent of gross domestic product this year to 2.5 percent in 2022. “To put the budget on a sustainable path, Congress has to increase the percentage of tax collections, cut Social Security and health care programs, or some combination,” said CBO director Doug Elmendorf. While the outlook’s accuracy does depend on the economy’s overall performance, he admitted, “more critical will be the choices made by lawmakers.”
Even with those stark numbers, CBO’s projected deficit is far more optimistic than the political signals from Capitol Hill and the White House warrant. The non-partisan agency’s baseline budget presumes current law, which dictates that the Bush era tax cuts and other tax provisions that have been a major drain on government revenues expire at the end of this year. It also presumes that over $1 trillion in new budget cuts go into effect starting in January 2013. Neither is likely.
That’s why the new CBO budget and economic outlook projects that unemployment will remain above 7 percent until 2015, absent any major change in current law. “That [economic] pace of growth partly reflects the dampening effect on economic activity from the higher tax rates and curbs on spending scheduled to occur this year and especially next,” the report stated.
If the tax increases and budget go into effect, it would have a dramatic impact on future deficits. Starting next year deficits will be cut by over 40 percent and continue shrinking for most of the rest of the decade, the report said. Between 2013 and 2022, the nation would add just $3 trillion to the national debt, which is significantly less than has been added in just the last three years.
As a result, debt held by the public would drop, from 75 percent of the Gross Domestic Product in 2013 to 62 percent of GDP in 2022, which the study notes is still higher than in any year between 1952 and 2009.