Monday, April 9, 2018

CBO makes it official, $1 trillion deficits, higher growth now, lower growth in 2020s

To follow up from yesterday’s post about the Congressional Budget Office’s outlook on the US’s fiscal situation, the numbers came out today, and as predicted, deficits will get higher as things stand today.
The U.S. budget deficit will balloon over the next few years mainly because of deep tax cuts approved in December by congressional Republicans and President Donald Trump, the nonpartisan Congressional Budget Office said on Monday.

The deficit - the amount that Washington’s spending exceeds its revenues - will grow to $804 billion in fiscal 2018, which ends on Sept. 30, up from $665 billion in fiscal 2017, the CBO said, despite expectations of stronger near-term economic growth than the agency previously forecast.

The CBO forecast that deficits will “increase rapidly this year and over the next few years,” then stabilize, resulting in a projected cumulative deficit of $11.7 trillion for 2018-2027.
So let’s go inside the CBO outlook report, and see what those estimates are based on, and how it gets put into the projections for the country’s finances over the next 10 years.

First of all, the CBO thinks thast the GOP’s tax package will give the economy a short-term sugar high, leading to relatively rapid economic growth over the next 2 years.
In CBO’s projections, real GDP expands by 3.3 percent this year and by 2.4 percent in 2019 (see Summary Table 1). It grew by 2.6 percent last year. Most of the growth in output in the next two years is driven by consumer spending and business investment, but federal spending also contributes a significant amount this year. After averaging 1.7 percent from 2020 through 2026, real GDP growth is projected to average 1.8 percent in the last two years of the 2018–2028 period…

The largest effects on GDP over the decade stem from the tax act. In CBO’s projections, it boosts the level of real GDP by an average of 0.7 percent and nonfarm payroll employment by an average of 1.1 million jobs over the 2018–2028 period. During those years, the act also raises the level of real gross national product (GNP) by an annual average of about $470 per person in 2018 dollars. (GNP differs from GDP by including the income that U.S. residents earn from abroad and excluding the income that nonresidents earn from domestic sources; it is therefore a better measure of the income available to U.S. residents.).
Oooh, $40 a month…..if we’re lucky….as an average per person. If you’re not making 7 figures, you can bet it’ll be much less than that. And as the buzz of the tax cuts wears off, the CBO notes that the hangover and slower growth will begin.
The other two laws are estimated to increase output in the near term but dampen it over the longer term. The fiscal stimulus that they provide boosts GDP by 0.3 percent in 2018 and by 0.6 percent in 2019, in CBO’s assessment. However, the larger budget deficits that would result are estimated to reduce the resources available for private investment, lowering GDP in later years.
. And 3.3% real GDP growth this year? Let’s check back in 6 months and see if that holds.

The CBO also notes that while the economy might pick up short term, it won’t be enough to make the tax cuts “pay for themselves”, as Trump Administration hacks have been claiming. So the projected budget deficit will blow up to $804 billion for this Fiscal year ($848 billion on a structural level, due to Oct 1, 2017 falling on a Sunday), and near $1 trillion in 2019.
The deficit that CBO now estimates for 2018 is $242 billion larger than the one that it projected for that year in June 2017. Accounting for most of that difference is a $194 billion reduction in projected revenues, mainly because the 2017 tax act is expected to reduce collections of individual and corporate income taxes.

For the 2018–2027 period, CBO now projects a cumulative deficit that is $1.6 trillion larger than the $10.1 trillion that the agency anticipated in June. Projected revenues are lower by $1.0 trillion, and projected outlays are higher by $0.5 trillion.
This puts the projected deficit consistently above the projections that we had when this Piece of Shit went through Congress and was signed by trump in December.

Keep in mind that these increased deficits are DESPITE the CBO going along with the theory that the tax cuts will provide juice in the economy to the tune of 4.7 million jobs added in the next 2 years, and unemployment dropping to 3.3% (!) nationwide next year.

Sure makes you wonder how bad those deficit numbers get if the economy doesn't go into overdrive. With 21st Century corporations frequently choosing to lay people off, buy back stock and hoard profits over creating jobs and increasing wages, I’d be surprised if the full rosy scenario described by CBO will happen.

On the flip side, CBO claims that the economy slows significantly from there, with GDP growth getting cut in half in 2020 vs 2018, and unemployment rising from 3.3% to 4.6% by the end of 2022. In addition, the CBO says that's around the time the deficit peaks, and as a result, interest rates will be higher, with the 10-year Treasury note rising from its current 2.8% to 4.1% in the next 2 ½ years. In addition, the CBO says inflation will bump up to around 2.5% for the next 3 years.

Put those projections together with another CBO report on Friday, which gave its analysis of the budget figures at the halfway point of the 2018 Federal Fiscal Year. In addition to reporting a $598 billion deficit for the first 6 months of FFY 2018, the CBO report also gives the first indications on how the GOP tax cuts were truly reducing revenues (they were).
The federal government incurred a deficit of $207 billion in March 2018, CBO estimates—$30 billion larger than the deficit in March 2017.

CBO estimates that receipts in March 2018 totaled $213 billion—$3 billion (or 2 percent) less than those in the same month last year. Withholding of individual income and payroll taxes fell by $5 billion (or 2 percent). Two factors contributed to that decline: March 2018 had one fewer business day than March 2017; and the share of wages withheld for taxes was lower, CBO estimates, reflecting the new withholding tables issued in January by the IRS.

Corporate income tax payments declined by $9 billion (or 66 percent). Typically, only a small share of total corporate taxes are paid in March.

Refunds of individual income taxes declined by $12 billion (or 16 percent), which boosted net receipts, offsetting most of the declines in receipts from other sources. The share of total annual refunds paid in March varies from year to year. Considered together, refunds paid in February and March were similar to those paid during the same period last year.
This means the CBO is counting on the deficit for the next 6 months to only total $206 billion, despite the lower withholdings and higher spending from the federal government. Yes, most payments on tax returns come in for April, and that’ll explain why the 2nd half deficit should be less than the 1st half one, but keep an eye on what that looks like in a few months to see if the deficit remains relatively in check. If not, the spiraling to a $1 trillion deficit will be even sooner than 2020.

In summary, the CBO was as nice as they could be to the Republicans in their report today, claiming that their Piece of Shit tax bill will mean a significant jump in GDP growth and boom times in the next 2 years. Even then, the CBO said that the tax cuts won’t pay for themselves, meaning that the 2020s look to be rough years where Americans will be held back because we have to clean up for the GOP’s mess.

Just like this country had to do in the early 1990s, and how we had to sort out the Great Recession’s wreckage a decade ago. Funny how that seems to happen when Republicans are in charge.


  1. Is it cynical for us to think that the Cons are setting up progressives to win the house and senate in November and forced to deal with this massive deficit and causing massive cuts?

    1. You can never be too cynical with the modern-day GOP. I absolutely think this is part of the plan.

      Hey, it tied Obama's hands and helped lead to the disastrous 2010 election that led to gerrymandering and the dysfunctional mess in DC that led some to vote for Drumpf to "shake things up."