Capitol Correspondence - 02.04.20

Federal Deficit Tops One Trillion Dollars, Possibly Influencing Future Discussions on Spending, Entitlements

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With President Trump having expressed interest in entitlement reform, it is important for our members to be aware of the broader economic context in which policymakers operate. As such, we are sharing this report by Politico Pro on the deficit crossing the $1 trillion mark:

“The federal deficit under President Donald Trump will top $1 trillion this year, the Congressional Budget Office announced in its annual fiscal outlook on Tuesday.

The gap between the amount of money the federal government spends and how much revenue it brings in is expected to continue to widen, averaging $1.3 trillion every year for the next decade. While the current economy is strong, the independent budget agency said the nation will suffer unless Congress makes “significant changes to tax and spending policies.”

CBO Director Phillip Swagel said “changes in fiscal policy must be made to address the budget situation, because our debt is growing on an unsustainable path.”

Takeaways from the nonpartisan scorekeeper’s latest tally:

The economy’s still strong: CBO projected that economic output will grow 2.2 percent this year, “driving continued job creation and a historically low unemployment rate.” But some factors expected to grow that output “would taper off in later years,” slowing to an average annual rate of 1.7 percent.

For example, the budget agency projects that the growth of consumer spending will level off as the boost from the 2017 tax overhaul, H.R. 1 (115), diminishes.

Federal revenue will increase, but so will spending: In a growing economy, revenues are on track to increase from 16.4 percent of GDP this year to 18 percent of GDP in a decade. CBO said growth partly reflects a scheduled increase in individual income taxes at the end of 2025.

At the same time, federal spending is also projected to rise, driven by increased spending for mandatory programs like Social Security and Medicare, in addition to interest on the national debt. An aging population and ballooning health care costs will continue to drive federal spending well beyond 2030, CBO notes.

Debt growing toward record level: The national debt topped $22 trillion just two years into Trump’s tenure, and federal debt held by the public is projected to rise to $31.4 trillion at the end of 2030, CBO said. That amounts to 98 percent of GDP.

Absent significant policy changes, debt held by the public could climb as high as 180 percent of GDP in 2050, “well above the highest level ever recorded in the United States,” the budget office noted.

Deficit reaches $1 trillion milestone: Measured as a percentage of economic output, the deficit is projected to widen from 4.6 percent of GDP this year to 5.4 percent in 2030.

CBO’s annual report follows recent Treasury Department data that found the year-end deficit exceeded $1 trillion in 2019, marking the first calendar year during which the budget gap has blown past the trillion-dollar mark since 2012.

The worsening deficit comes despite the president’s 2016 campaign pledge to balance the budget and curb federal spending. Instead, the budget gap expanded after the administration and Congress embraced the Republican tax revamp in 2017 and a two-year budget deal, H.R. 3877 (116), last summer.

Top officials at the White House budget office have failed in their attempts to substantially cut spending. And although Trump is expected to propose funding reductions in the release of his fiscal 2020 budget on Feb. 10, the president is expected to back spending bills later this year that increase federal funding by a total of $5 billion for the military and non-defense programs, in honoring the bipartisan deal his administration struck with congressional leaders last year.”