Deficit Plunging, but Will Soar Again Soon: CBO

Deficit Plunging, but Will Soar Again Soon: CBO

By Yuval Rosenberg and Michael Rainey
Wednesday, May 25, 2022

Our hearts go out today to the families of the 19 children and two teachers killed in the horrific and sickening school shooting in Uvalde, Texas. We can only hope that this nightmare won’t be repeated ever again — but hope alone won’t make that a reality.

The American Medical Association in 2016 called gun violence a "public health crisis." Tragically, the crisis and the carnage have only continued. Just two days ago, the FBI said it had designated 61 active shooter incidents in 2021, up 52.5% from 2020 and 96.8% from 2017. The number of people killed in those shootings — 103 — was the highest since 2017.

We’ll return to more fiscal matters below, but among the challenges the nation faces, gun violence is a plague that simply can’t be ignored. Thoughts and prayers won’t cure it.

Deficit Will Shrink to $1 Trillion This Year — and Then Soar for Years to Come: CBO

The White House has been eager to take credit for the fact that the federal deficit is falling dramatically this year, and a new report from the Congressional Budget Office confirms that the budget gap will indeed drop to $1 trillion in 2022 — a huge decrease from the $2.8 trillion deficit recorded in 2021.

As many fiscal experts have pointed out, though, the decrease in the budget deficit is largely a one-time event driven by the expiration of temporary aid programs tied to the pandemic, and the long-term story is quite a bit different. According to the CBO’s latest 10-year outlook, released Wednesday, the deficit will start rising again next year as it returns to its pre-pandemic trajectory, with larger shortfalls that will average $1.6 trillion per year between 2023 and 2032.

As a percentage of the economy, the deficit is expected to rise to levels rarely seen in the post-war period. The CBO projects a budget deficit of nearly $2.3 trillion in 2032, equal to 6.1% of gross domestic product. "The deficit has been greater than that only six times since 1946," CBO says.

Inflation will stay elevated through next year: Higher-than-expected inflation over the last year shaped the CBO’s latest projections, and the agency now estimates that increases in consumer prices will remain elevated, with a 4% rate in the final quarter of the year and a 6.1% rate for the full year. In 2023, CBO expects inflation to come in at 3.1%, but drop below 3% by the end of the year, closer to the Federal Reserve’s long-term target of 2% — the level CBO forecasts for 2024.

The economy is projected to grow by 3.1% in 2022, but then slow. "After 2022, several factors—including tightening monetary policy and waning fiscal support—combine to slow the growth of output," the CBO says, producing an average GDP growth rate of 1.6% from 2023 to 2026.

Tax revenue at a two-decade high: The strong recovery from the pandemic is helping to produce record tax receipts, and the CBO now expects federal revenues to rise by $800 billion this year. As Politico’s Brian Faler points out, that 19% increase from the year before — the largest jump in nearly four decades — is roughly equal to the entire Pentagon budget.

Total tax receipts are expected to equal 19.6% of GDP, the highest level since the dot-com bubble more than 20 years ago.

Growing debt: Thanks to the surging economy, the national debt measured as a percentage of the economy dipped this year, falling to about 96% of GDP. But the latest projections show the debt-to-GDP ratio rising again starting in 2024, climbing to 110% by 2032. In nominal dollar terms, the debt will grow from $23.8 trillion today to $40.2 trillion over the next 10 years.

Interest costs expected to triple: CBO expects interest rates to continue their recent upward trend, with 10-year Treasury rates increasing from roughly 2.8% today to 3.8% by 2028.

Higher interest rates mean higher debt-servicing costs. CBO estimates that by 2032, annual interest costs will total nearly $1.2 trillion — the highest level since at least 1940, and at 3.3% of GDP, more than the country is expected to pay for national defense. In all, the U.S. will spend $8.1 trillion over the next 10 years to service the debt, an increase of $1.9 trillion over last year’s estimate.

Quote of the Day: Fed Forecasts More Half-Point Rate Hikes

"Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings. Many participants assessed that the Committee's previous communications had been helpful in shifting market expectations regarding the policy outlook into better alignment with the Committee's assessment and had contributed to the tightening of financial conditions."

From the minutes of the Federal Reserve's May 3-4 policy meeting, released Wednesday. The minutes reinforced that half-point rate hikes are likely at the Fed’s upcoming meetings, but they also left room for the possibility that the bank’s "expedited" rate hikes would leave it room to reassess and adjust as needed later in the year.

Number of the Day: 5.6%

A new study in the journal Heath Affairs find that last year’s temporary expansion of the child tax credit helped cut rates of very low food security by more than half, from 12.7% to 5.6%. "Among parents participating in the expansion, food and beverage purchases were the most common use of expanded CTC funds (45.9 percent), particularly in households with very low food security (63.0 percent)," said the report by researchers at the University of South Carolina and Virginia Commonwealth University.

The researchers also found that food security increased from 57.4% to 66.4% and suggest that the temporary expansion of the credit also led to reduced consumption of sugary drinks, though they say that both food insecurity and the quality of diet were likely affected by schools reopening, allowing for kids to get school meals. Still, they conclude, the expanded tax credit payments may have had real public health benefits by lessening food insecurity.

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