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CBO: Deficits and inflation higher, but so is economic growth

The agency expects the Fed to keep its benchmark interest rate target steady

Congressional Budget Office Director Phillip Swagel testifies during a House Budget Committee hearing on Feb. 14.
Congressional Budget Office Director Phillip Swagel testifies during a House Budget Committee hearing on Feb. 14. (Tom Williams/CQ Roll Call)

The fiscal situation has worsened since earlier this year, with spending higher than expected and revenue lower than anticipated, according to the Congressional Budget Office’s latest update of its budget projections.

In its semiannual outlook released Tuesday, the CBO now estimates the current fiscal year will end with a deficit of $1.9 trillion — $408 billion or 27 percent more than the $1.5 trillion the agency projected in its February report.

And over the next decade, the cumulative deficit also will be higher — $2.1 trillion, or 10 percent more than the agency estimated earlier this year.

The higher deficits accompany the CBO increasing its estimate of spending and lowering its estimate of tax revenue, though over the full 10-year period receipts end up slightly higher.

About 80 percent of the increase in the fiscal 2024 deficit is driven by higher projected spending, including a $145 billion increase in student loan costs stemming from revisions the administration made to the estimated cost of loan subsidies, and from a proposed rule to reduce borrowers’ repayment obligations.

Other factors include higher projected spending for federal deposit insurance — a function of delayed recoveries of costs incurred in 2023 to resolve several bank failures, money the CBO expects to collect over time; newly enacted legislation, primarily the $95 billion foreign aid supplemental; and higher-than-expected spending on Medicaid.

The agency also revised its economic forecast, projecting stronger economic growth this year — 2 percent growth of real, inflation-adjusted gross domestic product rather than the 1.5 percent estimated in February. Higher price increases will accompany the added growth: The CBO now projects 2.7 percent rather than 2.1 percent inflation as measured by the personal consumption expenditures price index. Unemployment will be lower — 3.9 percent compared with 4.2 percent — in the latest projections.

As a result of this faster growth coupled with stickier inflation, the CBO now expects the Federal Reserve to keep its benchmark interest rate target right where it is through the end of this year. Fed policymakers last week issued projections showing a majority expect at least one rate cut this year from current range of 5.25 percent to 5.5 percent, the highest in over 23 years.

Top Democrats have been pressuring Fed officials to begin cutting rates sooner, arguing the longer they remain at elevated levels, the better the odds of a recession. Despite faster-than-expected growth, lingering inflation continues to hinder President Joe Biden’s reelection prospects, with recent polls showing former President Donald Trump running ahead of the incumbent in key swing states.

In a statement after the CBO report’s release, House Budget Chairman Jodey C. Arrington, R-Texas, said “unsustainable” spending negates the benefit of additional revenue in the forecast “by undermining the prowess of the U.S. economy, further eroding consumer confidence and fueling the cost of living crisis for American families.”

Andrew Bates, the White House’s senior deputy press secretary, countered that Biden’s budget plan would cut deficits by raising taxes on corporations and wealthier households while pumping more money into programs that benefit the middle class.

“Joe Biden knows the last thing we should do is flood Main Street with debt so Park Avenue can sun bathe in tax welfare and Greedflation,” Bates wrote in a memo. “Today’s CBO report is a warning against exactly that.”

Immigration impact

Immigration is another factor weighing on voters this fall, with Trump seeking to capitalize on voter concerns over border security.

Biden on Tuesday announced sweeping new executive actions that would, among other things, allow spouses and children of U.S. citizens to remain in the country while applying for green cards. At the same time, last week he announced plans to bar migrants who cross the border from receiving asylum when such crossings reach elevated levels.

The CBO has been looking into the import of increased migration on the economy, finding an uptick in economic activity and employment as a result.

The agency analyzed the impact of the “surge” in immigration that the agency estimates will have brought 8.7 million additional people into the country between 2021 and 2026. That’s compared to a more typical 200,000 foreign nationals who come to the U.S. annually, or a more than sevenfold yearly increase, on average.

The CBO estimates such heavy immigration will increase economic growth by $8.9 trillion, or 2.4 percent, over the 2024-2034 period.

Revenue is projected to rise by $1.2 trillion, primarily as a result of individual income and payroll taxes paid by immigrants. At the same time, benefits provided to immigrants — such as premium tax credits to purchase health insurance on government-run exchanges, earned income and child tax credits, Medicaid and food stamps — will increase spending by $278 billion, including the cost of interest on the federal debt. Overall, deficits would drop by $897 billion on net as a result of the increased immigration.

This is the last set of budget projections that CBO will issue before the November elections. As a result, the worsening budgetary picture could play a role in influencing the way lawmakers of both parties weigh policy priorities, including spending increases and tax cuts.

The CBO and the Joint Committee on Taxation, which estimates the budgetary impact of tax policies, believe that making permanent provisions of the 2017 GOP tax overhaul that are scheduled to expire next year could cost $4.6 trillion over a decade, including added debt service. That’s not including other extensions of tax policies that have either already expired or are set to, which could push total 10-year costs well north of $5 trillion.

John T. Bennett contributed to this report.

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