CBO: Deficit Will Be Huge But Not Massive

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The Congressional Budget Office (CBO) estimates that the federal budget deficit for 2010 will exceed $1.3 trillion—$71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010, when it issued its previous estimate. Relative to the size of the economy, this year’s deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year’s deficit of 9.9 percent of GDP. As was the case last year, this year’s deficit is attributable in large part to a combination of weak revenues and elevated spending associated with the economic downturn and the policies implemented in response to it, the agency reported today.

The news gets worse as the CBO looks out over the next few years:

All of those forces, along with the waning of federal fiscal support, will tend to restrain spending by individuals and businesses—and, therefore, economic growth—during the recovery. CBO projects that the economy will grow by only 2.0 percent from the fourth quarter of 2010 to the fourth quarter of 2011; even with faster growth in subsequent years, the unemployment rate will not fall to around 5 percent until the end of 2014.

The Administration has projected much more aggressive expansion of GDP which mean that the deficit will almost certainly be higher than it has forecast due to a revenue shortfall caused by anemic receipts to the IRS. The compounded effect of high unemployment and severe concerns about future joblessness among the currently-employed will keep consumer spending low enough that it could severely damage the retail industry which is expecting a better holiday shopping season than it has in 2009.

Business receipts will also remain low because of the amount of GDP that is based on consumer spending. Enterprises are also likely to defer major purchases and upgrades of current good and services to keep costs low.

In sum, the recovery, one much slower than The White House assumed, put more pressure on adopting the severe austerity measures that Japan and many European nations have. Those measures are, however, ones that no sane politician will vote for if he want to keep his job.

Douglas A. McIntyre