The Congressional Budget Office has upped its estimate of current and future deficits largely as a result of the two-year budget deal enacted last month, which the agency projects will add $1.7 trillion in red ink over 10 years.
That forecast assumes that the increased spending in fiscal 2020 and 2021 thanks to the higher caps will continue throughout the decade-long budget window, growing with inflation. At the same time, changes to the economic forecast and a reduction in estimated interest rates will partly offset the spending increases, the agency said in its latest budget and economic outlook.
The deficit is now projected at $960 billion in fiscal 2019, up $63 billion from the $896 billion the CBO estimated in May. Over the fiscal 2020-29 period, the cumulative deficit is projected to be $12.2 trillion, or $809 billion larger than in the previous estimate.
Growth forecasts for most of the decade are basically unchanged from prior projections. Real gross domestic product would see a boost in the next two years from the spending deal, though weighed down somewhat by tariff increases implemented by the Trump administration.
Real GDP growth is expected to be 2.3 percent this year, measured from the fourth quarter over the same period in 2018, or down from 2.5 percent last year. During Trump’s reelection campaign in 2020, the CBO sees growth trending down to 2.1 percent, a far cry from the 3 percent the administration has said its policies will produce.
A recession doesn’t appear imminent in the new forecast, though that isn’t unusual for the CBO. And next year’s growth estimate is 0.4 percentage points higher than it was in January.
Interest rates are once again a major driver of reduced spending, with debt service costs over a decade estimated at $1.4 trillion lower than in the previous forecast, despite the added debt from the new spending deal. The benchmark 10-year Treasury note is now expected to yield 2.3 percent this year and 2.2 percent next year, down sharply from January’s forecast of 3.4 percent and 3.6 percent, respectively.
In addition to the budget deal, the CBO said, supplemental appropriations for disaster relief and border security will increase the deficit. The CBO estimated that the supplemental appropriations will add $255 billion to the deficit over the 2020-29 period. That is based on the agency’s assumption that the additional funding will grow with inflation.
Under the new projections, the deficit would top $1 trillion in fiscal 2020, two years earlier than previously projected. The fiscal 2020 deficit, at $1.008 trillion, would be $116 billion higher than earlier projected. The fiscal 2021 deficit is estimated at $1.034 trillion, or $72 billion higher than previously projected.
The last time deficits topped $1 trillion was fiscal 2012, as the U.S. was still digging out from the Great Recession.
When measured as a share of the economy, however, the picture looks a little better: Deficits as a percentage of GDP are expected to average 4.7 percent over the next decade. That’s significantly above what economists view as a comfortable level, but well below the 8.4 percent average of the fiscal 2009-12 period, when deficits last hit 12 digits.