Federal Deficit Is Set to Rise Sharply, CBO Warns

An elderly couple walk down the street on May 13, 2014 in Melbourne, Australia. 
National Journal
Billy House
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Billy House
Aug. 27, 2014, 6:10 a.m.

Fed­er­al budget short­falls are pro­jec­ted to rise sub­stan­tially through the next dec­ade, more than doub­ling to $960 bil­lion by 2024, for­cing high­er fed­er­al spend­ing on in­terest pay­ments and lim­it­ing law­makers’  flex­ib­il­ity to deal with fisc­al chal­lenges, con­gres­sion­al aud­it­ors warned Wed­nes­day.

“Such high and rising debt would have ser­i­ous neg­at­ive con­sequences for both the eco­nomy and the fed­er­al budget,” warns the new re­port from the Con­gres­sion­al Budget Of­fice, provid­ing an up­date on the na­tion’s eco­nom­ic out­look.

The main causes? A rise in So­cial Se­cur­ity spend­ing for an aging pop­u­la­tion, by al­most 80 per­cent through 2024; ex­pan­sion of fed­er­al sub­sidies for health in­sur­ance, by al­most 85 per­cent; and the grow­ing in­terest pay­ments on fed­er­al debt.

These grim pro­jec­tions come des­pite what the re­port says is a fed­er­al de­fi­cit that, for now, is still de­clin­ing. But that will soon change.

The budget de­fi­cit at the end of fisc­al 2014 (which comes on Sept. 30) is es­tim­ated to be $506 bil­lion, roughly $170 bil­lion lower than the 2013 short­fall.

CBO does pre­dict that eco­nom­ic growth will pick up in the next few years and that in­creased hir­ing will bring the un­em­ploy­ment rate down.

And re­l­at­ive to the size of the eco­nomy, this year’s de­fi­cit””at 2.9 per­cent of the gross do­mest­ic product””will be slightly be­low the av­er­age of the past 40 years; this is the fifth con­sec­ut­ive year in which the de­fi­cit has de­clined as a per­cent­age of the gross do­mest­ic product since peak­ing at 9.8 per­cent in 2009.

At the same time, however, the debt held by the pub­lic will in­crease for the sev­enth year in a row, reach­ing 74 per­cent of GDP””the highest ra­tio since 1950. And ac­cord­ing to CBO, fed­er­al debt un­der ex­ist­ing spend­ing policies will rise to 77 per­cent of GDP by 2024, roughly twice the 39 per­cent av­er­age of the past four dec­ades.

Along with caus­ing fed­er­al spend­ing on in­terest rates to rise, the re­port says “the large amount of debt might re­strict policy makers’ abil­ity to use tax and spend­ing policies to re­spond to un­ex­pec­ted chal­lenges, such as eco­nom­ic down­turns or fin­an­cial crises.”

“Fi­nally, con­tin­ued growth in the debt might lead in­vestors to doubt the gov­ern­ment’s will­ing­ness or abil­ity to pay its ob­lig­a­tions, which would re­quire the gov­ern­ment to pay much high­er in­terest rates on its bor­row­ing,” the re­port warns.

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