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Policy: Budgets & Deficits

CBO lowers deficit projections

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Politics,Beltway Confidential,Congress,Philip Klein,Budgets and Deficits,CBO

On Tuesday, the Congressional Budget Office said that the federal government would run a $642 billion deficit in 2013, which is about $200 billion lower than previously forecast due to “higher-than-expected revenues and an increase in payments to the Treasury by Fannie Mae and Freddie Mac. ”

If it holds, this would be the lowest since the 2008 deficit of $458.8 billion.

According to CBO projections, deficits will continue to shrink, reaching a low of $378 billion in 2015 before starting to grow again to $895 billion by 2023. Over the 2014-23 timeframe, CBO now projects cumulative deficits of $6.3 trillion, or $618 billion lower than projected in February.

CBO explains:

For the 2014–2023 period, deficits in CBO’s baseline projections total $6.3 trillion. With such deficits, federal debt held by the public is projected to remain above 70 percent of GDP — far higher than the 39 percent average seen over the past four decades. (As recently as the end of 2007, federal debt equaled 36 percent of GDP.) Under current law, the debt is projected to decline from about 76 percent of GDP in 2014 to slightly below 71 percent in 2018 but then to start rising again; by 2023, if current laws remain in place, debt will equal 74 percent of GDP and continue to be on an upward path (see figure below).

Such high and rising debt later in the coming decade would have serious negative consequences: When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges. Finally, a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

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