The federal deficit will fall just shy of the $1 trillion mark next year, but eclipse that number in 2020 and then indefinitely, the Congressional Budget Office projected Monday in a report that reflects the long-run budget challenges facing the government that Congress has exacerbated with spending increases and tax cuts.
The government’s annual shortfall will total $804 billion in fiscal 2018 and rise to $981 billion in fiscal 2019, the CBO estimated, and then top the $1 trillion mark in 2020 before growing indefinitely. Previously, it hadn’t seen trillion-dollar deficits before 2022.
The CBO is Congress’ official, nonpartisan agency for providing budget and economic analysis. Monday’s report is the first set of 10-year budget reflections to incorporate the fiscal effects of the tax cuts pushed through by President Trump and the congressional GOP in December and the spending increases they enacted with Democrats last month.
The report shows that Congress should expect a big increase in annual deficits thanks to its actions over the past year. December’s tax cut and March’s government spending bill added $2.7 trillion to aggregate deficits over 10 years, the CBO calculates, although that hit to the government’s coffers is offset by about $1.1 trillion through faster economic growth. Yet if all the tax cuts and spending increases were made permanent, it would add roughly another $1 trillion to the 10-year deficits.
Even before the past year’s tax cuts and spending increases, the long-run mismatch between spending and revenue had posed a major threat to the nation, the CBO had warned for years. A serious long-foreseen problem is that growth in entitlement programs, especially retirement programs such as Social Security and Medicare, entail spending well above tax revenue during the years ahead as the baby boomers retire.
As a result, the federal debt is now expected to reach 96 percent of the economy by 2028, up from about three-quarters of gross domestic product currently. Last year, the CBO had pegged debt at about 91 percent of GDP in 2027. If the tax cuts and spending increases were made permanent, the debt projection would rise to 105 percent of GDP.
“The likelihood of a fiscal crisis in the United States would increase” if the debt is allowed to rise that high, the CBO warned.
But rising debt isn’t the only consequence of the growth of entitlement spending. Another effect is that spending on retirement and healthcare programs has forced Congress to cut back spending on everything else in recent years.
Non-defense discretionary spending — that is, spending by Congress on law enforcement, job training, federal agencies, and everything the government does besides social insurance and defense — is set to slip below 3 percent of GDP, down from an already low level by historical standards.
On the other side of the government ledger, tax revenues also are set to tumble, relative to the size of the economy. Trump’s tax cuts are set to send collections down to 16.5 percent of GDP in 2019, down from as high as 18.1 percent in 2015.
Budget experts at the independent CBO do not see the same kind of major lift to the economy that the Trump administration said would follow the tax overhaul and other free-market programs, and in turn lift tax revenue as businesses earned more and workers took more and better-paying jobs.
The budget office does see higher economic growth and lower unemployment over the next 10 years thanks to the tax law, but not enough to offset its costs. Overall, it is expected to add about $1.9 trillion to deficits over the decade, when interest costs are included.
