Deficit Falls Slightly, Debt Will Continue to Soar, CBO Warns

 The federal deficit in FY10 is expected to be $1.35 billion--a slight drop from the $1.41 trillion in FY09--but still the second largest in our nation's history, CBO says in its "Budget and Economic Outlook: Fiscal Years 2010-2020," released this morning. But CBO warns that if, as expected, Congress enacts legislation that will increase spending or reduce revenue, the deficit in 2020 will remain the large share of GDP that it is now and that debt held by the public would equal close to 100 percent of GDP. The $1.3 trillion deficit represents 9.2 percent of GDP, slightly smaller than the 9.9 percent last year. CBO also forecasts that that next year's deficit could drop to $980 billion, but only if all tax cuts passed during the administration of George W. Bush were allowed to expire--an unlikely scenario. This year's deficit is expected to remain close to last year's because spending on stimulus legislation and income support programs will climb, while assistance to the financial sector will drop. In August, CBO predicted that the FY09 deficit would reach $1.59 trillion and that the deficit in FY10 would be $1.38 trillion.

The large deficits will result in federal debt continuing to climb. At the end of 2009, debt held by the public was $5.8 trillion or 53 percent of GDP. By the end of 2020, that debt is expected to climb to $1.5 trillion, or 67 percent of GDP. As the debt increases and interest rates climb, interest payments on the debt will soar. CBO projects that spending on net interest will more than triple between 2010 and 2020 in nominal terms, going from $207 billion to $723 billion and will more than double as a share of GDP.

And CBO warns that its projections understate likely political scenarios, including extension of the tax cuts, changes to the alternative minimum tax and larger-than-inflation increases in appropriations. For instance, baseline projections show revenues rising to 20.2 percent of GDP by 2020, with almost half of that increase attributed to an assumption that tax cuts will be allowed to expire. The Committee for a Responsible Federal Budget will release its analysis of the CBO report later today.