February 8, 2017
The Congressional Budget Office recently released its budget deficit forecast for the period from 2017-2027. The budget deficit for fiscal year 2016 came in at $587 billion. For the current fiscal year (FY 2017) the budget deficit is projected to be $559 billion. It will remain fairly steady during the next couple of years, but will begin to climb again about 2020 primarily as more and more baby boomers retire and begin to draw Social Security and become eligible for Medicare. By 2027 it is expected to be $1.4 trillion.
It is important to remember that the U.S. actually had modest budget surpluses in FY’s 2000 and 2001. And from 2002 to 2007 the deficits were consistently in a range from $200-300 billion. The recent widening of the deficit was largely the result of the extraordinarily deep recession that lasted from the end of 2007 through mid-2009.
The best way to determine whether a deficit is “big” or “small” is to look at the deficit in relation to the size of the economy, or the deficit as a percent of GDP. Over the course of the past 50 years, the budget deficit as a percent of GDP has averaged about 3.0%. This should be regarded as a “sustainable” deficit. Unfortunately, by 2027 — a decade from now — the deficit will climb to 5.0% of GDP. That is too large and if something goes wrong it could be even bigger. The goal should be to shrink it to no more than 3.0% of GDP during the course of the next decade.
While the normal budget forecasting cycle is 10 years, if one looks just beyond that 10-year horizon the situation gets significantly worse. If nothing is done to correct the situation by 2047 the annual budget deficits will climb to 9.0% of GDP.
None of these charts reflect policy changes that the Trump Administration would like to make. We know that he wants to cut both individual and corporate income tax rates which, by themselves, would boost the budget deficit. But he expects GDP growth to pick up to 4.0% within a few years which would (he hopes) generate enough tax receipts to offset the tax cut. On the spending side he has said that he intends to increase defense spending. But that is only about 17% of total government spending. We do not know what the rest of the spending side will look like. When his proposals are clearer, the CBO will score those policy changes. We simply do not know enough to be able to come up with any meaningful estimate at this time.