The Congressional Budget Office today released its outlook for the budget deficit. No surprise: the deficit, as a proportion of GDP, is expected to fall considerably from 9.9 per cent in 2009 to 2.6 per cent in 2015, after which it will rise again. 
What’s going to make it go up after 2015? Health care, of course. Here’s a pretty phenomenal graph from the Center for Economic and Policy Research based on the CBO’s projections from last year (which have changed slightly, but the overall trend is still the same).
The yellow line shows CBO baseline projections and the blue line shows how the deficit will grow if health care costs rise only because of the ageing population. The red and green lines show the surplus – yes, a surplus! – if the US were able to bring its health costs down to the levels of Canada and the UK, two countries with longer life expectancies than the US.
But that’s old news. What has changed in this year’s economic and budget outlook?
- Budget deficits: We’re number 2! Our budget deficit as a percent of GDP in 2010 is expected to be the second largest in the post-WWII period, that is. (Of course, 2009 was #1, and, at an estimated 9.9 per cent, it was quite a bit larger than the CBO’s 8.3 per cent projection at the beginning of last year. And, of course, the 9.2 per cent projection is a whole heap larger than the 4.9 per cent projection last year.
- Interest payments: “Poised to skyrocket.” The CBO’s words, not mine. Debt held by the public is projected to increase from 53 per cent at the end of 2009 to 67 per cent the end of 2020. That, combined with the expected increase in interest payments as the economic recovery strengthens leave interest payments “poised to skyrocket.” (The phrase bears repeating).
- GDP: Our economy is performing about 6.5 per cent below full capacity, the CBO estimates. Whoof. The CBO notes that its forecasts are lower in 2010 and 2011 than that of most economists, but the group attributes this to private forecasters assuming that Congress will extend recent temporary tax cuts (those from 2001, 2003 and 2009). The CBO does not make this assumption. Medium-term nominal GDP forecasts are only slightly down from last year – with the CBO expecting GDP to grow 5.6 per cent annually from 2012 to 2014, compared to last year’s forecasts of 5.7 per cent growth from 2011 to 2014. But expected GDP growth in 2010 has been revised up sharply from 2.5 per cent to 3.2 per cent. (Don’t get too excited: in 2009, GDP fell by an estimated 1.3 per cent, compared to a forecast of a 0.4 per cent drop).
- Unemployment: The CBO has increased its unemployment forecast in the short-term, but the medium-term projections are pretty similar. This year, the CBO projects a 10.1 per cent unemployment rate, whereas last year it was 9.0 per cent. But keep in mind, the expected 2009 rate was 8.3 per cent, which we surpassed in March. Medium-term, the CBO projections are more or less the same. In 2009, they expected the annual average from 2011 to 2014 to be 6.4 per cent. This year, the projected annual average for 2012 to 2014 is 6.5 per cent.
- Inflation: Inflation is expected to be more subdued in the short- and medium-term, with the average increase in the Consumer Price Index now forecast at 1.3 per cent annually from 2012 to 2014, compared to a 2.1 per cent forecast last year (from 2011 to 2014).
- Fed gets kudos: Just an aside, but the CBO writes, “Although aggressive action on the part of the Federal Reserve and the fiscal stimulus package enacted in early 2009 helped moderate the severity of the recession and shorten its duration, the support coming from those sources is expected to wane.” Which brings us to…
- The slow road ahead: The CBO notes that consumer and business spending normally pick up quite quickly after recessions, since there’s a backlog of demand after people delayed purchases in uncertain economic times. The CBO expects a spending boost this time around as well, but the spending, it says, will likely be dampened by a number of factors. Among them “the continuing fragility of some financial markets and institutions; declining support from fiscal poilcy as the effects of the [fiscal stimulus] wane and tax rates increase because of the scheduled expiration of key tax provisions; and slow wage and employment growth, as well as a large excess of vacant houses.”
