Monday, March 09, 2015

CBO Projection: Budget Deficit to be lower than previous forecast

by Bill McBride on 3/09/2015 11:15:00 AM

The Congressional Budget Office (CBO) released their new Updated Budget Projections: 2015 to 2025

Under the assumption that current laws will generally remain unchanged, the budget deficit is projected to decline in 2016, to $455 billion, or 2.4 percent of GDP, and then to hold roughly steady relative to the size of the economy through 2018. Beyond that time, however, the gap between spending and revenues is projected to grow faster than GDP: The deficit in 2025 is projected to reach $1.0 trillion, or 3.8 percent of GDP ...

CBO’s estimate of the deficit for 2015 is $18 billion greater than the shortfall it projected in January, mostly because the agency has increased estimated outlays for student loans, Medicare, and Medicaid. In contrast, the projected deficits for the 2016–2025 period total $431 billion less than the cumulative deficit that CBO projected in January. The largest factor underlying that reduction is a downward revision to projected growth in private health insurance spending, which is estimated to lower the net cost of the provisions of the Affordable Care Act (ACA) that are related to insurance coverage and to increase overall revenues from income and payroll taxes (because a larger share of employees’ compensation over the coming decade is now projected to be paid in the form of taxable wages and salaries).
emphasis added
The CBO projects the deficit will decline further in 2015, 2016 and 2017, and be below 3% of GDP for the next five years.

This is a significant improvement from the previous forecast.  As an example, last year, the CBO forecast the deficit to be 2.9% in 2016; now the CBO is forecasting the deficit will be 2.4% in 2016.

US Federal Government Budget Surplus DeficitClick on graph for larger image.

This graph shows the actual budget deficit each year as a percent of GDP, and an estimate for the next ten years based on estimates from the CBO.

After 2017, the deficit will start to increase again according to the CBO.

From a policy perspective and using these projections, further short term deficit reduction is not a priority.