CBO says deficit going higher and higher

There was a lot of big economic news this week, and high on the list was Congressional Budget Office’s new budget projections for the next 10 years.

The major headline in this report is that the federal deficit is projected to be even more in the 2019 Fiscal Year than what was projected.

In CBO’s baseline projections, the 2019 budget deficit is $960 billion, which is $181 billion more than the shortfall recorded last year (see Table 1-1). That increase would be smaller if not for a shift in the timing of certain payments. The 2018 deficit was reduced by $44 billion because certain payments that would ordinarily have been made on October 1, 2017 (the first day of fiscal year 2018), were instead made in fiscal year 2017 because October 1 fell on a weekend. If not for that shift, last year’s shortfall would have been $823 billion, and the estimated increase in the deficit in 2019 would be $137 billion, or 17 percent (see Table 1-2).

Later on, the CBO unequivocably says that the GOP’s Tax Scam is not paying for itself, as income tax withholdings continue to be lower than the last fiscal year..

Although wages and salaries are projected to grow by about 4 percent in 2019, individual income taxes withheld from paychecks will decrease by $18 billion (or 1 percent), in CBO’s estimation. That decline reflects two factors: First, the Internal Revenue Service issued new withholding tables in January 2018 to reflect changes made by the 2017 tax act (P.L. 115-97). Those new withholding rates were in effect during all of this fiscal year but for only seven-and-a-half months of 2018. Second, withheld taxes classified as individual income taxes were boosted in 2018 and reduced in 2019 by reallocations made between income and payroll taxes. Specifically, the Treasury recategorized about $21 billion in collections from payroll to individual income taxes during 2018 and about $7 billion from individual income to payroll taxes so far in 2019. The Treasury does not observe a difference between amounts withheld for payroll and income taxes as they are collected, instead initially allocating withheld taxes to one source or the other on the basis of estimates. As detailed tax-return information becomes available, amounts are reallocated between payroll and income taxes. Even though those revisions amend allocations made in prior years, the reallocations are made in the current fiscal year.

But don’t worry, some of that was made up for by smaller tax refunds earlier this year.

Nonwithheld payments of individual income taxes are expected to rise by $9 billion (or 1 percent) in 2019. Those payments include both estimated and final payments for the 2018 tax year, as well as estimated payments for the 2019 tax year. Refunds, largely for the 2018 tax year, are expected to be $23 billion (or 9 percent) lower than last year, further boosting net receipts. The extent to which those changes reflect the effects of the 2017 tax act or other factors will become clearer as detailed tax-return data become available over the next several years.

Another factor in increasing future deficits is a spending and debt ceiling deal that House Dems, Senate Republicans and President Trump agreed to last month. The CBO says this will significantly boost the deficit starting next year.

Projections of discretionary spending for the 2020–2029 period are based on funding provided in 2019 (adjusted for inflation), taking into account limits on such funding required by law. The recently enacted Bipartisan Budget Act of 2019 (P.L. 116-37) raised the limits (or caps) on discretionary appropriations by a total of $171 billion for 2020 and by $153 billion for 2021.9 CBO’s baseline projections for those two years incorporate the new limits, and funding for those two years is projected to be at or slightly below those new caps (see Table 1-5 on page 21). For 2022 and later years, those projections reflect the assumption that funding constrained by the caps keeps pace with inflation. Some elements of discretionary funding are not constrained by the caps—in particular, appropriations designated for OCO, activities designated as emergency requirements, and some or all funding for disaster relief and some efforts to reduce overpayments in benefit programs. In addition, in accordance with the 21st Century Cures Act, a portion of funding for certain authorized activities—up to amounts specified in law— is exempt from the caps. For those elements, funding is generally assumed to grow with inflation from the amounts provided in 2019….

All told, before debt service is taken into account, the changes that CBO made to its projections to account for the enactment of the Bipartisan Budget Act of 2019 increased the cumulative deficit for the 2020– 2029 period by $1.5 trillion. The additional federal borrowing stemming from the larger annual deficits added $200 billion to CBO’s projection of total outlays for interest on federal debt over that period.

So that brings the total price tag of that 2-year move to nearly $1.7 trillion over the next 10 years, because those higher spending levels remain, even if the caps are put in place again starting in 2021.

What’s interesting here is that the CBO says that spending/debt ceiling deal won’t raise spending one dollar in FY 2019, so the increase in this year’s projected deficit is due to things getting worse than expected. Then the spending/debt ceiling deal raises the deficit even more!

So why was that deal agree to in a time of higher deficits? Because CBO says the added spending will help the economy.

CBO’s current economic forecast has some notable differences from the forecast the agency published in January. In particular, CBO has lowered its projections of interest rates in response to new data and recent guidance from the Federal Reserve regarding its outlook for monetary policy. Projected average annual economic growth over the 2020–2023 period was revised upward because of the Bipartisan Budget Act of 2019 (which led CBO to increase its projections of federal discretionary spending over the next decade) and recent economic developments.

The CBO says that this means real GDP growth will be 2.3% for 2019 and 2.1% for 2020, instead of the sub-2% figures projected before (CBO says it’ll drop below 2% in 2021).

Given the increasing chances of recession these days, I’d say that number seems a bit rosy, but you can bet that short-term economic boost in 2020 is what Mitch McConnell and Donald Trump were counting on when they signed on last month to a budget deal that increased spending caps and let the debt ceiling be increased.

They don’t care what happens to the US economy after that. Not that you should need more reasons to want these old men gone from power in DC, but there it is.

Bottom line, a high US budget deficit is set to become even bigger, even if there is no recession.

Since May 2019, CBO has increased its projection of the 10-year deficit by a total of $0.8 trillion. The largest factor in that revision was the Bipartisan Budget Act of 2019, which increased projected deficits for the 2020–2029 period by $1.7 trillion (including debt service costs). A reduction in projected net interest outlays, which stemmed from lower projected interest rates than those in CBO’s January 2019 forecast, offset much of that increase.

That last sentence is also a “WOW.” If you dig into the charts, you’ll see that the CBO says the projected drop in interest rates and a similar decline in projected inflation saves taxpayers more than $1.1 trillion over the next 10 years. And yet, the deficit STILL would go up by $809 billion above where we were a few months ago.

But don't worry, Trump and other Republicans have an idea on how to deal with the deficit if this country is stupid enough to keep him in office after 2020.

Republican lawmakers say they're hopeful Trump will pivot to deficit reduction in a second term. @ESCochrane https://t.co/6bn2eDPJTI pic.twitter.com/xUaPvUmlxI

— Jim Tankersley (@jimtankersley) August 21, 2019

I've got a better idea. When House Dems come back from their too-long vacation, they can use this new information on higher deficits to demand a dollar-for-dollar rollback of the GOP Tax Scam in exchange for this new spending, and possibly combine it with a deficit-neutral move that lowers the Social Security tax for most, while raising the cap on earnings that pay into Social Security.

It's time to make the GOP answer for what they plan to do as a result of their reckless fiscal policy, instead of having them spring it on the public after the 2020 election. A public showdown and possible shutdown connected to the FY 2020 budget next month is the perfect situation to make people think about the mess that has been made due to the Tax Scam and other GOP idiocy.