Deficits Rising as Economy Slows, CBO Says in Defying Trump View

(Bloomberg) -- U.S. budget deficits are set to widen further in coming years and economic gains will be “muted,” according to the Congressional Budget Office’s latest forecast, an outlook that’s weaker than the Trump administration’s target of at least 3 percent growth.

However, the budget deficit will hit $1 trillion two years later than previously projected, mainly due to lower disaster-relief spending, according to non-partisan arm of Congress.

The economy is forecast to slow over the next three years with the growth rate easing to 2.3 percent in 2019, 1.7 percent next year, and 1.6 percent in 2021, CBO said in its annual long-term budget outlook on Monday. Growth was an estimated 3.1 percent last year.

A burst of economic growth that was fueled by Republican tax cuts in 2018 will fade in the coming years, while tariffs imposed by the Trump administration on everything from solar panels to Chinese goods may dent the economy as well as hit business confidence, CBO said.

2019 Slowdown

“The slowdown begins in 2019 as the positive effects of recent tax legislation on business investment are expected to wane and federal purchases under current law are projected to drop sharply starting in the fourth quarter of this year,” according to the report.

The U.S. budget deficit is forecast to widen to $897 billion over the 12 months through September, from $779 billion last year. The CBO said the U.S. budget deficit will top $1 trillion in fiscal 2022, two years later than its forecast in April.

“That reduction in projected deficits results primarily from legislative changes -- most notably a decrease in emergency spending,” the CBO said, citing funds earmarked for natural disasters such as hurricanes.

What Our Economists Say...

“The CBO estimate is based on the sharp reduction in costs appropriated in this fiscal year, but Bloomberg economics does not view that as sustainable. Federal spending on emergency relief has been rising, and will continue to do so as climate change further exacerbates extreme weather events -- greatly increasing mitigation and relief and recovery costs.”

-- Tim Mahedy, Bloomberg Economics

Still, the U.S. debt burden will keep rising, the group said. “Because of persistently large deficits, federal debt held by the public is projected to grow steadily, reaching 93 percent of GDP in 2029 -- it’s highest level since just after World War II.”

The budget gap has continued to balloon under President Donald Trump, as a combination of Republican tax cuts that will add up to about $1.5 trillion over a decade and increased government spending are adding to budget strains.

The last time the U.S. ran a budget gap larger than $1 trillion was between 2009 and 2012 when the Obama administration was unleashing a bailout for the financial markets and a stimulus plan to pull the country out of recession.

The White House has said the tax cuts will pay for themselves by creating more revenue through faster and sustainable economic growth, though the latest data show that isn’t expected to happen. The International Monetary Fund has warned the tax reductions risk putting the nation’s debt on an unsustainable path and could cause the economy to overheat.

$1 Trillion Threshold

The CBO estimated in April that the budget deficit for the entire fiscal year would increase to $804 billion, before widening to $981 billion in fiscal 2019 and topping $1 trillion in 2020.

The concern among deficit hawks is that ballooning debt risks a nation’s credit-worthiness, increases borrowing rates, and downgrades its status in the global financial system if it grows aggressively past gross domestic product -- though these are worst-case scenarios and not likely to happen to the U.S., the world’s largest economy.

Risks are exacerbated by a trade war with China and overall slowing in the U.S. economy as it nears its longest-ever expansion on record. As company and consumer spending eases, thereby cooling annual GDP expansion, the country’s debts end up piling up faster than it can pay them off.

A spending bill to reopen the government through Feb. 15 removed the looming risk of the five-week partial shutdown having a broadening economic impact. The U.S. economy probably permanently lost $3 billion from the shutdown, CBO said in a separate report.

©2019 Bloomberg L.P.