The nonpartisan Congressional Budget Office ramped up its estimate for this year’s US budget deficit by 27% to almost $2 trillion, sounding a fresh alarm about an unprecedented trajectory for federal borrowing.
The CBO sees the deficit reaching $1.92 trillion in 2024, up from $1.69 trillion in 2023, according to updated projections released in Washington Tuesday. The new estimate is more than $400 billion larger than what the CBO anticipated in February — in part reflecting additional spending, including aid for Ukraine, enacted since then, along with Biden administration student-loan relief measures.
In its economic forecasts underpinning the fiscal outlook, the CBO now sees faster growth and higher inflation for this year. The Federal Reserve is seen holding off on lowering interest rates until the first quarter of 2025, versus the mid-2024 timeline the CBO penciled in back in February. The CBO’s economic forecasts were finalized in early May — before the Fed’s latest meeting.
As a share of gross domestic product, the US deficit is now seen widening, not shrinking, for the 2024 fiscal year, which runs through September. The ratio is estimated at 6.7%, compared with the February forecast of 5.3% and the 6.3% logged for 2023.
By comparison, European Union nations have a guideline of keeping shortfalls at 3% or less. The US averaged 3.7% over the past half-century, according to the CBO.
“Total deficits equal or exceed 5.5% of GDP in every year from 2024 to 2034,” in the new forecasts, the CBO said. “Since at least 1930, deficits have not remained that large for more than five years in a row.”
Tuesday’s projections continued to show the US heading for record levels of debt relative to GDP, and escalating interest costs — which for this year will exceed defense spending. Over the coming decade, the CBO sees US deficits totalling $22.1 trillion, up more than $2 trillion from February’s report.
“Every lawmaker – and presidential candidate – should be offering solutions and should pledge no new borrowing other than for actual emergencies,” Maya MacGuineas, the president of the budget watchdog group Committee for a Responsible Federal Budget, said before the CBO release.
As for the deterioration in the 2024 forecast versus February, the CBO cited the following as among the reasons:
- President Joe Biden’s student loan forgiveness plans, which added $145 billion in red ink.
- The congressional bill enacted to aid Ukraine, Israel and Taiwan, which helped to boost discretionary spending by $60 billion.
- A $70 billion reduction in the estimated amount the Federal Deposit Insurance Corporation will recoup from payments made to cover bank failures in 2023 and 2024.
- An increase in estimated Medicaid spending.
These trends overrode revenue increases that the CBO said would stem from higher economic growth than projected a few months ago. The office now expects a 2% increase in GDP in the fourth quarter of calendar 2024 over the same period of 2023 — up from February’s 1.5%.
Inflation, as measured by the Fed’s preferred PCE price gauge, is seen at 2.7%, compared with the 2.1% forecast in February. Consumer prices came in hotter than many economists forecast in the first three months of this year, though data now price pressures eased in May.
Fed policymakers are expected to start lowering rates next year, with their benchmark falling to 3% by late 2028, holding steady from there on, the CBO said. Fed officials’ own median estimate for the rate over the longer run, updated last week, is 2.8%. The midpoint of the current target level is 5.33%.
The outsize US deficits also come despite an acceleration in immigration that has helped to boost growth and revenues. The CBO sees the surge continuing through 2026. The office estimates that this dynamic lowers total deficits by some $900 billion over a decade.
CBO projections are based on current legislation. That includes an assumption that the $95 billion foreign-aid package enacted in April will now add $95 billion, plus inflation each year, in discretionary spending going forward.
It also includes an expectation for many of former President Donald Trump’s tax cuts to expire as scheduled at the end of next year. The CBO has separately estimated that extending those provisions could add $4.6 trillion more in red ink.
“We should not accept deficits of this size as the ‘new normal,’” Bob Bixby of the Concord Coalition, a budget watchdog group, said before the CBO release. “Doing so would harm the economy over the long term and condemn today’s younger Americans to a life of cleaning up the mess we’re leaving them.”
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