The combination of President Donald Trump's massive tax cuts and last month's big-ticket spending bill should drive the federal government's budget deficit above the $1 trillion market by 2020, two years ahead of estimates, according to a recent report by the Congressional Budget Office (CBO). As the deficit rises sharply, the CBO expects little impact of spending and tax cuts on long-term economic growth.
The federal deficit, or the gap between how much the government takes in in revenue and how much it shells out, is expected to skyrocket 21% over last year to reach $804 billion in the fiscal 2018 year ending September. The CBO, a non-partisan arm of the Congress, had forecast in June for a federal deficit of $563 billion.
"The federal budget deficit grows substantially over the next several years,” said CBO Director Keith Hall on Wednesday after his agency released the report. “Federal debt is projected to be on a steadily rising trajectory throughout the decade."
Economic Output to Grow 0.7% on Average
In December, the Trump administration passed sweeping tax cuts that temporarily lowered taxes for some individuals and permanently reduced the corporate tax rate from 35% to 21%, freeing up billions for some of America's largest corporations and incentivizing overseas cash repatriation. The CBO report estimates that the tax overhaul will cost the government $1.3 trillion in revenues over 10 years. Including interest payments, the debt caused by the new tax cut will amount to $1.9 trillion, according to the CBO. (See also: Trump ‘Very Serious’ About 'Phase 2' of Tax Cuts.)
Republicans had justified massive tax cuts on the idea that they would ignite economic growth to offset the deficit additions. The Monday report indicated that the bill will boost economic output by an average of just 0.7% through 2028. The budget office expects American wages and salaries to rise by an average of 0.9% annually over the period. The analysis forecasts that the law will increase interest rates by half of a point, boosting the strength of the dollar and increasing the national trade deficit, counter to Trump's hopes to reduce it.
The deficit became bigger again in March when members of both parties supported a $300 billion increase on military and domestic spending over two years. (See also: Share Buybacks Double Under Trump Tax Plan.)