CBO projects widening budget deficit

In the wake of Fitch Ratings downgrading the long-term credit rating for the U.S. a notch to AA+ from AAA, it's instructive to examine the Congressional Budget Office's budget outlook that it released in June.

For the current fiscal year, which ends Sept. 30, the CBO projects the budget deficit will reach 5.8% of gross domestic product from fiscal 2022's 5.2%. It projects widening long-term deficits, including 6.4% in 2033 and 10% in 2053. The 2053 projected deficit would be the highest since World War II and the COVID-19 pandemic, according to the CBO.

The CBO expects spending to outpace revenue gains, including increased interest costs, along with health care and Social Security spending. On the revenue side, the CBO based its projection on certain provisions of the 2017 tax law expiring in 2026.

The CBO expects public debt as a percentage of GDP to be 98% this fiscal year vs. 97% a year earlier. But the agency projects this will increase, reaching 181% in 2053. The CBO notes the higher debt's negative effects, such as slower economic growth, increased interest payments to foreign holders of debt, and restricted fiscal policy choices.

The CBO projects moderate economic growth in the mid-1% range in the coming decades. It also expects unemployment above 4%, up from 2022's 3.6%.