Daily Management Review

US budget deficit will exceed $ 1 trillion in 2020


The August agreement between Democrats and Republicans to add up to the US budget borrowing limit will lead to an increase in its deficit to $ 1 trillion as early as fiscal year 2020. In general, a gradual increase in the deficit will lead to growing volume of US public debt over the next ten years from 79% to 95% of GDP, the US Congress budget department calculated.

Ron Cogswell via flickr
Ron Cogswell via flickr
The total US budget deficit in the next ten years will be $ 12.2 trillion, follows from the updated macro-forecast of the US Congressional Budget Office (CBO). Compared with the May forecast, this figure grew up to $ 809 billion. At the same time, without taking into account interest payments on debt, the deficit will increase by $ 1.9 trillion (of which $ 834 billion is due to an increase in military spending). However, this growth will be partially offset by the current decrease in the required yield on US government bonds as this will reduce the cost of servicing the public debt by $ 1.1 trillion over ten years.

The forecast of the US budget deficit for this fiscal year (started in October 2018) compared with May increased by $ 63 billion, up to $ 960 billion, or up to 4.5% of GDP.

In fiscal 2020, the figure will reach $ 1.008 trillion. In subsequent years, the deficit will average $ 1.2 trillion. In relation to GDP, this is equivalent to 4.4–4.8%, which is significantly more than the average over the past 50 years. Against this background, the volume of public debt will increase from 79% of GDP to 95% in 2029 (the May forecast assumed an increase to 92%).

Most of all, the August agreement between the Democrats and Republicans to increase the ceiling on government spending by two years contributed to the growth of the deficit in order to avoid another stoppage of government work in October this year. In 2019, US budget revenues will amount to $ 3.5 trillion, or 16.3% of GDP. They will increase to 18.9% of GDP by 2029 (this reflects the growth of income tax over the past two years). Expenditures this year will amount to $ 4.4 trillion, or 20.8% of GDP - and grow to 23% of GDP in 2029.

At the same time, real US GDP growth is projected at 2.3% of GDP in 2019. Moreover, actual output will exceed the estimate of potential output. Therefore, in the future, growth in consumption and government spending will slow down, and after that the growth rate of GDP will reach 1.8% on average for 2020–2029. At the same time, potential output will also grow by 1.8%.

At the same time as the forecast was updated, the CBO evaluated the effect of the 2017 tax reform, which provided, in particular, for a sharp reduction in corporate taxes. Earlier, the department predicted that the adoption of the reform would reduce tax revenues by $ 144 billion in 2018 and $ 271 billion in fiscal years 2019. Actual corporate tax fees were 16% lower, and income tax - 3% higher than the forecasted level. At the same time, investments, as predicted, grew by 5.9% last year. A more significant increase in the indicator was hindered by the uncertainty in the outcome of trade disputes between the United States and China.

source: bloomberg.com

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