CBO Releases Grim Budget Update

Today CBO released its annual summer budget update and economic forecast.  The projections are about as grim as we expected them to be.  CBO estimates that this year, the deficit will exceed $1.3 trillion ($27 billion less than CBO projected earlier this spring).  At $1.3 trillion, the deficit will be the second largest in 65 years as a share of GDP.  At 9.1% of GDP, it is second only to last year’s deficit – 9.9% of GDP.  Similar to last year, the deficit is due to a combination of weak revenues from the floundering economy and huge spending increases on stimulus measures.  Other highlights from the report:

 

•    The deficit will decline to 4.2% of GDP by 2012 assuming the stimulus measures of the last two years expire as scheduled, and none of the 2001 and 2003 tax rates are extended.  (Remember, the Administration and the Democrat Congress have widely stated the rates will be extended for everyone but the top tax bracket).

•    Growth will continue to be a sluggish 2% through the fourth quarter of 2011, due to continued high unemployment, drags on business investment, and restrained consumer spending.

•    Projected deficits will total $6.2 trillion for the 10 years starting in 2011, increasing the federal debt to more than 69% by 2020.  This is almost double the debt at the end of 2007, 36% of GDP.

•    However, CBO also projects that if a more realistic scenario is used including the extension of the current tax rates and indexing the AMT for inflation, the deficit in 2020 would be much higher and equal about 8% of GDP, and debt held by the public would total nearly 100% of GDP.

 

The CBO finds that beyond the 10-year budget window examined in these projections, the nation will face very daunting fiscal challenges due to the aging population and the explosion in health care spending.  For more on this problem, you can see our latest piece.  Mr. Elmendorf concludes that “Putting the nation on a sustainable fiscal course will require policymakers to restrain the growth of spending substantially, raise revenues significantly above their average percentage of GDP of the past 40 years, or adopt some combination of those approaches.” 

We couldn’t agree more.