The U.S. deficit will shrink to $1 trillion this year, before beginning to soar in 2024, just as Americans prepare to elect the next president, Congress’ nonpartisan budget forecaster predicted Wednesday.
While the nation’s shortfall has substantially declined following last year’s $2.8 trillion deficit, the Congressional Budget Office estimates the gap between spending and revenue will grow starting in 2024, reaching more than 6 percent of GDP a decade from now. The U.S. has only run greater deficits than that six times since 1946, CBO noted.
The Biden administration stressed the upside. It wasn’t “automatic or inevitable” that the U.S. has notched “the single largest nominal reduction in the federal deficit in American history,” White House budget director Shalanda Young said.
“It’s because this administration has responsibly managed the pandemic,” Young said, “which allowed us to wind down emergency measures, combined with a significant increase in revenues stemming from an historically strong economic recovery.”
On Capitol Hill, lawmakers have been clamoring for months to see the budget office’s new predictions, as concerns about inflation and the deficit factor into negotiations, including talks about revamping the Build Back Better package Sen. Joe Manchin (D-W.Va.) stunted in December.
CBO doubled its expectations for inflation since it last issued updated projections in July 2021. The agency now sees the personal-consumption expenditures index rising 4 percent in the fourth quarter from the same period a year earlier, then slowing to 2.3 percent next year.
Last July, CBO estimated inflation would return to the Fed’s 2 percent target by the end this year. Now, it doesn’t see that happening until after 2024.
The agency maintained its forecast for economic growth this year, estimating real gross domestic product will rise 3.1 percent in the fourth quarter of 2022 compared to a year earlier, due in large part to strong consumer spending.
That’s a slightly more optimistic forecast than the 2.8 percent growth projection Federal Reserve officials released in March. But it’s a step down from the rapid expansion seen in 2021, as the war in Ukraine, elevated inflation and rising interest rates are expected to weigh on economic activity.
CBO also sees several factors holding back growth after this year, including higher interest rates and waning government spending, which will slow GDP growth to 2.2 percent in 2023 and 1.5 percent in 2024, according to the latest projections.
Buoying the country’s fiscal outlook in the near term, the U.S. is expected to rake in a substantial amount of cash from taxes this year and see a dip over the next two years in federal debt held by the public. Both of those boons are expected to be short-lived, however.
After dipping to 96 percent of GDP next year, federal debt held by the public is projected to reach 110 percent of GDP a decade from now, higher than it has ever been. Federal debt will then grow to 185 percent of GDP in 2052, the budget office predicts.
Many fiscal conservatives warn that Congress needs to take drastic action to head off that debt climb, to save the U.S. from a financial crisis like that of Greece, where the debt-to-GDP ratio has surpassed 200 percent in recent years.
Budget forecasters see revenues jumping this year by 19 percent, a whopping $800 billion. That would come on top of last year’s 18 percent increase.
The increases will be across the board, CBO predicts, with individual income taxes leading the way, thanks in part to surging inflation. Higher nominal wages translate into bigger tax payments to the Treasury.
Altogether, receipts will reach the highest level, compared to the size of the economy, since 2000.
The budget office is more than three months late in releasing the much-anticipated fiscal predictions. By law, the agency is supposed to publish the detailed forecast by mid-February so lawmakers can use it to guide the debate on funding the government before the new fiscal year kicks off in October.
A slew of fresh estimates in the report are also expected to help narrow predictions for the nation’s next debt cliff.
Pressing up against the U.S. borrowing cap late last year, Congress increased the country’s debt limit to more than $31 trillion, a ceiling expected to suffice until at least the end of December. With CBO’s new projections for fiscal influences like revenue and interest rates, economic forecasters will likely home in on estimates for when the U.S. will rack up enough debt to near that new limit and risk defaulting on the nation’s loans.
The timing of the debt limit deadline is likely to be crucial in deal-making to fund the government and other cross-party talks that follow the November midterm elections and that could substantially change party split in both the House and Senate.