Federal deficits are projected to grow much more than expected over the next decade after a budget agreement struck last month, pushing government debt as a share of the economy closer to the highest level since World War II, the Congressional Budget Office said.

The deal agreed upon by congressional leaders and the White House will add roughly $1.7 trillion to deficits between 2020 and 2029, assuming federal spending continues to rise by the rate of inflation beyond 2021.

Much of that increase will be offset by lower-than-expected interest rates, which will reduce the cost of servicing the government’s swelling debt by $1.4 trillion over the next decade, the CBO said in the updated budget projections.

In total, deficits are now expected to rise $809 billion more than the agency projected just a few months ago, bringing total deficits over the next decade to $12.2 trillion.

Annual deficits as a share of economic growth are expected to average 4.7% over that period, higher than the 4.4% the CBO estimated in May and well above the 2.9% average over the past 50 years.

Overall, the CBO said government debt as a share of the economy is expected to rise from 79% this year to 95% in 2029—up from 92% when the agency released its 10-year forecasts in May and the highest level since just after World War II, when debt exceeded the size of the economy.

“The nation’s fiscal outlook is challenging,” CBO Director Phillip Swagel said. “To put it on a sustainable course, lawmakers will have to make significant changes to tax and spending policies—making revenues larger than they would be under current law, reducing spending below projected accounts, or adopting some combination of those approaches.”

Lawmakers have shown little appetite, however, for reining in federal spending or raising taxes. Investors are unfazed by the rising government red ink.

The latest budget deal, which lifts spending by roughly $320 billion over the next two years above spending caps enacted in 2011, received broad bipartisan support, even as fiscal hawks warned it would enshrine trillion-dollar deficits.

Higher spending on disasters and border security in 2019 also boosted projected deficits by $255 billion over the next 10 years, assuming that spending continues to grow, the CBO estimated.

The latest projections come as White House officials have begun discussing potential stimulus measures that would help cushion the U.S. economy from a potential downturn and likely add billions more to government debt.

President Trump said today he wasn’t currently looking at any form of tax cuts, a reversal from a day earlier when he floated possible moves to spur economic activity.

Deficits typically shrink when the economy is doing well, as low unemployment and rising wages push up tax revenues for the government, and automatic spending on safety-net programs such as unemployment insurance declines.

Instead, deficits as a share of the economy have been rising in recent years despite an uptick in economic output, due in part to weaker federal revenues following the 2017 tax law, higher federal spending on the military and retiree benefits and rising interest costs.

Although government receipts have begun to pick up 18 months after the 2017 tax cuts took effect, they haven’t kept pace with rising federal spending or broader economic growth.

The Treasury Department said earlier this month the U.S. budget gap has widened by 27% in the first 10 months of the fiscal year, which began Oct. 1, 2018.

Higher deficits have also led the government to ramp up borrowing over the past two years: Treasury estimated it will borrow more than $1 trillion in 2019 for the second year in a row.

Meanwhile, the risks of a deepening economic downturn appear to be rising abroad and could be spreading to the U.S. economy, as heightened trade tensions and slower global growth weigh on economic activity.

The CBO said Wednesday higher tariffs are expected to reduce the level of U.S. GDP by 0.3% by 2020, primarily by raising prices, which reduces consumers’ purchasing power and increases the cost of business investment.

Tariffs also reduce average real household income by $580, or 0.4%, by 2020, the CBO projected.

Higher federal spending is expected to cushion the economy from some of those effects over the next few years: the CBO lifted its forecast for GDP to 2.1% in 2020, from a projected 1.7% in January, and 1.8% in 2021, up from 1.6% in January.

 

Attribution:WSJ
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