Despite Congress approving a deficit-reduction plan earlier this month, the U.S. is still set to increase its national deficit over the next decade, while economic growth is expected to be modest and the unemployment rate remains high, according to the Congressional Budget Office (CBO).
The CBO released its updated 10-year budget and economic outlook Wednesday, with director Douglas Elmendorf noting on his blog that, “The United States continues to face profound budgetary and economic challenges.”
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The nation’s deficit is expected to be $1.3 trillion this year, making 2011 the third-straight year the deficit has exceeded $1 trillion, though the deficit was greater in both 2009 and 2010. This year will mark the third-largest shortfall in the last 65 years, after 2009 and 2010.
In the next decade, the country is expected to accrue $8.5 trillion in new debt, with annual deficits outweighing gross domestic product each year by about 4.3%. The deficit for 2011 is expected to be 8.5% of GDP. The debt held by the public, which excludes money owed to government trust funds like Social Security, is expected to rise to 82% of the size of the economy, its highest since 1948.
While those estimates might seem high, they are an improvement over the CBO’s estimates made in January, which had the country accruing $12 trillion in debt by 2021 rather than the downwardly revised $8.5 trillion the CBO now predicts. According to Elmendorf, “About two-thirds of that reduction stems from the effects of enacting the Budget Control Act, which set caps on future discretionary spending and created a process for adopting additional deficit reduction measures.”
However, CBO estimates are based on the assumption that policies current in place now will continue in effect through 2021, though most are set to expire before then, and depending on the political climate at the time of their expiration, may not be renewed. In many cases, the government would increase its tax revenue by not renewing policies, as would be the case if the Bush tax cuts were allowed to expire at the end of 2012, as scheduled. The same goes for measures meant to protect the majority of Americans from having to pay the Alternative Minimum Tax.
If lawmakers let these expensive policies expire, then the CBO’s debt forecast will improve, with the country accruing only $3.5 trillion in debt over the next decade, $5 trillion less than it would were all current policies to remain in place. By contrast, the debt could exceed current predictions if lawmakers fail to enact the $1.2 trillion of additional deficit reduction agreed upon August 2 as part of the debt-ceiling deal that already cut $917 billion.
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The gross domestic product is expected to grow at a modest rate of 2.4% this year, 2.6% in 2012, and then an average of 3.6% for the next three years. And with economic growth remaining slow, the CBO forecasts that unemployment will remain high, above 8% until 2014, then an average of 7% each year between 2013 and 2016, and an average of 5.2% between 2017 and 2021. In its release, the CBO wrote, “It takes time for households to rebuild wealth and pay down their debts, for financial institutions to restore their capital bases and the supply of credit and for businesses to regain the confidence necessary to invest in new facilities and equipment.”