The Congressional Budget Office (CBO) projected in its June budget baseline that in Fiscal Year 2022 the federal deficit will once again exceed $1 trillion (4.5 percent of GDP). However, much has happened since that CBO estimate was made. Three hurricanes have battered the United States and its territories, congressional leaders on both sides have suggested increases in discretionary spending (in different parts of the budget), and Republicans in Congress are developing a tax reform package.
Incorporating these recent developments significantly increases deficits. Using reasonable assumptions, we now forecast deficits could reach $1 trillion as soon as Fiscal Year 2019, three fiscal years sooner than previously projected.
Using the following assumptions, deficits are projected to reach $1 trillion in FY2019:
- Begin with the CBO baseline from June, including economic and technical assumptions
- Assume total federal disaster relief costs for fires, hurricane damage, and floods over the next ten years will be about $200 billion, distributed by fiscal year as has historically been the case
- Assume a tax reform bill is enacted in the first quarter of calendar 2018, adding $1.5 trillion to deficits over the decade, and is not retroactive to FY2017i
- Assume that the statutory sequester caps are fully repealed during the anticipated budget showdown coming this December, as described in CBO’s selected policy alternatives
To put increases in deficits and increases in federal indebtedness into context, the figure below illustrates the increase in debt held by the public as a percentage of GDP from 1980 to 2016. From 2001 to 2016 debt held by the public as a percentage of GDP has more than doubled.
It is not too late for policymakers to take action to put the federal government on a path to fiscal sustainability. As the former public trustees of Medicare and Social Security warned, our most important social programs that are the key drivers of our debt need to be addressed soon to avoid sharp benefit cuts or tax increases. However, given past inaction, we believe significant congressional reform efforts of entitlement programs, the driver of most of the deficits during the 37-year period studied, will continue to be nearly zero in the next year.
[i] With revenue reductions divided over the decade following the Tax Policy Center payout structure, but not following the magnitude of TPC’s projected deficit increases.