Business

US budget deficit back to 2009 recession high, CBO says

Capitol building in Washington DC
Image caption The 2011 budget deficit will almost equal that of two years ago, which was the highest in 65 years

The US budget deficit will hit $1.48tn (£930bn), or 9.8% of economic output, this year, a spending watchdog said.

It is a record deficit in dollar terms, and almost equals the 10% of GDP overspend recorded by Washington in 2009 at the depth of the recession.

The Congressional Budget Office (CBO) revised up an earlier deficit estimate of $1.07tn after President Obama agreed a new stimulus package with Congress.

That package extended Bush-era tax cuts and prolonged unemployment benefits.

"The United States faces daunting economic and budgetary challenges," said the CBO in the introduction to its latest budget outlook report.

The Office - which is tasked by the US legislature with providing non-partisan assessment of the evolution of the federal government finances - said deficits were predicted to fall sharply over the medium term.

Questionable assumptions

However, it warned that its forecasts assumed Congress would not pass further legislation that adds more to the deficit, something that has not been borne out in recent history.

"[The forecasts] understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law."

The CBO noted in particular that it was assuming that:

  • a sharp reduction in Medicare payments goes ahead as planned at the end of this year
  • unemployment benefits - which have been regularly extended in response to the unprecedented level of long-term joblessness - expire this year
  • President George W Bush-era tax cuts for higher income families, that have just been extended to 2012, are allowed to expire
  • other short-term tax cuts - such as a 2% payroll tax cut - included in the recent stimulus package are allowed to expire over the next two years
  • discretionary government spending only rises in line with inflation, instead of the much faster rate seen in recent years.

Even if these assumptions turn out to be correct, the CBO said US government debt would rise from the current 62% to 77% of economic output by 2021.

And with interest rates likely to rise as the economy recovers, the Office said the cost to US taxpayers of the interest payments on that debt was "poised to skyrocket over the next decade" from 1.5% to 3.3% of output.

Grim outlook

The budget watchdog also reiterated its concern that the outlook beyond 2021 for public finances remained unhealthy.

"The ageing of the population and rising costs for healthcare will push federal spending as a percentage of [gross domestic product] well above that in recent decades," the report said.

It projected that spending on the government's core health and retirement benefits would rise from 10% of GDP to 16% over the next 25 years.

The report also provided a grim assessment of the medium-term prospects for the economy.

Although the CBO expects growth of 3.1% this year and 2.8% next, the rates are slow compared with previous post-recession recoveries.

And the growth will not be enough to bring down unemployment quickly. Indeed, the current 9.4% is not expected to return to a more normal 5.3% until 2016.

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