WASHINGTON—The latest economic outlook by the Congressional Budget Office (CBO) shows that if spending continues at the projected pace the national debt and the federal deficit would reach alarming levels, causing a fiscal crisis in the United States.
The federal budget deficit will rise to $897 billion in 2019 and exceed the trillion-dollar level by 2022 for the first time since 2012, according to the CBO report.
Fiscally irresponsible spending bills coupled with the great recession boosted the debt dramatically over the past decade. And at the end of the 2018 fiscal year, the amount of public debt reached 78 percent of gross domestic product (GDP). The CBO estimates that debt held by the public will rise steadily over the next decade, reaching 92.7 percent of GDP by 2029 and 150 percent of GDP in 30 years.
“Even at its highest point ever, just after World War II, the debt was far less than that—106 percent of GDP,” Keith Hall, the director of the CBO said in his testimony at a congressional hearing on Jan. 29.
The CBO warns that high and rising debt would have significant negative consequences for the economy and the budget. It would substantially increase federal spending on interest payments and reduce national saving over time. Productivity and wages would decline, and the likelihood of a fiscal crisis would increase, according to the CBO.
President Donald Trump raised concerns about federal spending last year. He will release his 2020 budget proposal in February, calling for major cuts to spending.
“We anticipate a very strong, tough budget coming out to hold down spending,” Larry Kudlow, White House chief economic adviser, told reporters on Jan. 28. “The President has talked about this—at least 5 percent reduction in the nondefense accounts across the board.”
Kudlow believes the White House proposal will help reduce the deficit and its ratio to the GDP.
“Economic growth is absolutely essential to reducing the deficit share of GDP, which is the burden on the economy,” he added.
However, the White House and the CBO strongly disagree on the economic growth projections.
“Economic growth is the single biggest factor in compiling any of these numbers. So they [CBO] have had a very low growth estimate in response to Trump policies on taxes and deregulation, and we’ve had a much higher one—about a 1-percentage point differential, more or less,” Kudlow said.
If GDP grows more quickly than CBO’s projections, revenues would increase more than spending and deficits would be lower than projected.
“We anticipate a much lower deficit share of GDP,” Kudlow said, adding that based on their growth estimates the deficit is $3.5 trillion lower than CBO’s projection over the next 10 years.
Democrats have blamed Republican tax reform for adding nearly $2 trillion to the deficit over 10 years. According to Republicans, however, spending increases—not tax cuts—are driving deficits and debt to record heights.
The Tax Cuts and Jobs Act would increase the total projected deficit over the 2018 to 2028 period by about $1.9 trillion, according to the CBO. At the congressional hearing, however, Hall said the tax cuts increased the revenue and the economic growth in 2018. He also admitted that increasing taxes would slow the economy.
Cost of Shutdown
The partial government shutdown that ended Jan. 25 will cost the economy about $3 billion in the fourth quarter of 2018 and $8 billion in the first quarter of 2019, according to the CBO estimates. However, most of these losses will eventually be recovered, stated the report.
The CBO estimates that nearly $3 billion will not be recovered, which is 0.02 percent of projected annual GDP of this year.
The shutdown damped economic activity mainly because the furloughed workers did not contribute to GDP, the federal spending on goods and services were delayed, and total demand declined, stated the CBO report.
Kudlow dismissed the CBO estimates on the shutdown and said there would be no permanent damage to the economy.
“I won’t acknowledge any of that right now,” he said. “And in a $20 trillion economy, it’s awfully hard to make even the best guesstimates of those kinds of small fractions of numbers.”