10-Year Deficit Seen Down on Lower Interest Costs: CBO

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By Jonathan Nicholson

Aug. 23 — The good news from the Congressional Budget Office summer update was almost a trillion dollars less in projected interest costs on the national debt. The bad news was a slow economy that means the debt in proportion to the economy will remain high.

The nonpartisan CBO, in its update released Aug. 23, said it still expected the 2016 budget deficit to show the first annual increase since 2011, to $590 billion from $439.9 billion in 2015. The CBO initially made that forecast Aug. 5 in its monthly budget review (See previous story, 08/08/16).

Over the 2017-2026 budget window, the CBO revised its projected cumulative deficit downward by $712 billion from what it projected in January, a development that ordinarily would be met with some degree of applause from deficit hawks. But with a lower starting point for economic growth in the forecast, the debt as a percentage of gross domestic product—a measure many economists say gives the best picture of the U.S. debt burden—will remain close to previous projections, the CBO said.

‘Growth Stinks.'

“We have won the battle and lost the war. @USCBO lower 10-year deficit by $712b b/c growth stinks and interest rates will be lower,” said former CBO Director Douglas Holtz-Eakin in a tweet. Holtz-Eakin is president of the conservative American Action Forum think tank.

“Although deficits have declined from the high levels of the financial crisis, we continue to have a structural mismatch between spending and revenues, and it’s about to get a lot worse,” Michael Peterson, chief executive officer of the anti-deficit Peter G. Peterson Foundation, said in a statement.

Because of lower interest rates on U.S. government debt, the CBO said it had knocked off about $998 billion in borrowing costs over the 10-year budget window. By way of comparison, the 2012 “fiscal cliff” deal that the White House said would help reduce the deficit included increased taxes on higher income earners of more than $600 billion over 10 years.

Some of that savings from reduced interest costs was offset by lower revenue as well over the budget window. “The $428 billion reduction in projected revenues for 2017 through 2026 attributable to economic factors stems mostly from CBO’s expectation that GDP and its associated taxable income—primarily wages and salaries as well as corporate profits—will grow more slowly than previously projected, largely as a result of newly released data and changes in the method CBO uses to project productivity growth,” the CBO said.

End of Labor Overhang?

In its economic forecasts, the CBO said near-term growth would be stronger in the latter part of 2016, but would still be below what it had projected in January (See previous story, 01/20/16).

“Real gross domestic product (GDP) rose at an annual rate of just 1.0 percent in the first half of 2016. CBO expects a stronger second half, however, mainly because major forces restraining the growth of investment in the first half—such as a decline in oil prices that reduced mining investment—have begun to wane,” the CBO said.

While a pickup from first-half growth, the new CBO projection is still a markdown from the CBO’s last estimates made in January. The CBO said now it expects fourth-quarter-over-fourth-quarter real GDP growth of 2.0 percent for 2016 and 2.4 percent for 2017, down from the 2.7 percent for 2016 and 2.5 percent for 2017.

On the upside, though, the CBO said the overhang of potential workers either unemployed or out of the labor market, which remained stubbornly high since the end of the 2007-2009 recession, is close to being eliminated.

“Furthermore, the projected drop in the unemployment rate, combined with a labor force participation rate expected to approach its potential value in 2017, leads to a small projected employment surplus—that is, actual employment that is higher than CBO’s estimate of potential employment—from the second half of 2017 through 2018. The agency expects the surplus to peak at roughly a quarter of a million people in early 2018,” the CBO said.

To contact the reporter on this story: Jonathan Nicholson in Washington at jnicholson@bna.com.

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com.

For More Information

To read the CBO Update to the Budget and Economic Outlook, see: http://src.bna.com/hYn.

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