Deficit Will Fall To Just 3.0% Of GDP This Year


The CBO regularly creates projections of what the economy is going to look like over the next 10 years regarding deficits, revenue and federal spending. These projections are based on the assumption that laws regarding federal taxation & spending remain the same. With this in mind, they predict that the deficit will drop to $478 billion in 2015, which is 2.6% of the GDP. After this, the deficit is predicted to start growing in dollars and relatively to the size of the US economy. Revenue is expected to escalate at the same pace as the GDP, whilst spending is set to grow faster. The development of federal subsidies, elevated health care costs, increased federal interest rates and the aging of the population is boosting the spending rates. The federal spending on the other hand is set to fall to the lowest percentage since 1940, apart from in Social Security, net interest payments and major health care ventures.

The amount of federal debt relative to the economy size is now very high, even by historical standards. This is down to the large budget deficits, and the CBO predicts that it will equal 74% of the GBP at the end of this year, rising to 79% by 2024. This could spell serious bad news for the economy. It will give policy makers less flexibility when hit with unexpected challenges, retrain long-term financial growth and heavily increase the risk of fiscal crisis. This would be where investors start demanding higher interest rates in order for them to get involved with the governments debt.

The severe financial impact of the 2007-2009 recession forced a very slow recovery. CBO projects that in spite of this; the economy will steadily grow through 2014 and for the next few years. Real GBP (figures adjusted to incorporate inflation) will rise about 3% from the last quarter of 2013 and the last quarter of this year, which is the largest rise in around 10 years. The amount of ‘slack’ is set to grow over the following years. This is the unused capital and labor resource. The average unemployment rate is expected to drop, but CBO predict it wont drop below 6% until 2016. The lack of job opportunities has led to the rate of participation in the labor force, but this rate is expected to return to what it would be without the weak economy.

Due to long term trends such as the slower growth in labor force because of the aging population, CBO predicts that beyond 2017 the growth of the economy will slow way below the average rate seen in the last few decades. Inflation will remain at below 2% for the next decade. This is measured by the change in price index for the PCE (Personal Consumption Expenditures). Treasury securities have seen some of the lowest interest rates in their history since the economic downturn, but these are expected to pick up over the next few years, reflecting the strength of the economy.