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CBO Forecasts a Slowing US Economy and Rising Budget Deficit

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U.S. budget deficits are set to widen further in coming years and economic gains will be “muted,” according to the Congressional Budget Office’s latest forecast, a growth outlook that’s weaker than the Trump administration’s target of at least 3 percent growth.

However, the budget deficit is expected to hit $1 trillion two years later than previously projected, the non-partisan arm of Congress projected.

The economy is forecast to slow over the next three years with the growth rate easing to 2.3 percent in 2019, 1.7 percent next year, and 1.6 percent in 2021, CBO said in its annual forecast on Monday. Growth was an estimated 3.1 percent last year.

“The slowdown begins in 2019 as the positive effects of recent tax legislation on business investment are expected to wane and federal purchases under current law are projected to drop sharply starting in the fourth quarter of this year,” according to the report.

The U.S. budget deficit is forecast to widen to $897 billion over the 12 months through September, from $779 billion last year. The CBO said the U.S. budget deficit will top $1 trillion in fiscal 2022, two years later than its forecast in April.

“That reduction in projected deficits results primarily from legislative changes — most notably a decrease in emergency spending,” the CBO said.

‘Persistently Large’

Still, the U.S. debt burden will keep rising, the group said. “Because of persistently large deficits, federal debt held by the public is projected to grow steadily, reaching 93 percent of GDP in 2029 — it’s highest level since just after World War II.”

The budget gap has continued to balloon under President Donald Trump, as a combination of Republican tax cuts enacted last year — that will add up to about $1.5 trillion over a decade — and increased government spending are adding to budget strains.

The last time the U.S. ran a budget gap larger than $1 trillion was between 2009 and 2012 when the Obama administration was unleashing a bailout for the financial markets and a stimulus plan to pull the country out of recession.

The White House has said the tax cuts will pay for themselves by creating more revenue through faster economic growth, though the latest data show that’s not yet started happening. The International Monetary Fund has warned the tax reductions risk putting the nation’s debt on an unsustainable path and could cause the economy to overheat.

$1 Trillion Threshold

The CBO estimated in April that the budget deficit for the entire fiscal year would increase to $804 billion, before widening to $981 billion in fiscal 2019 and topping $1 trillion in 2020.

The concern among deficit hawks is that ballooning debt risks a nation’s credit-worthiness, increases borrowing rates, and downgrades its status in the global financial system if it grows aggressively past gross domestic product — though these are worst-case scenarios and not likely to happen to the U.S.

Risks are exacerbated by a trade war with China and overall slowing in the U.S. economy as it nears its longest-ever expansion on record. As company and consumer spending eases, thereby cooling annual GDP expansion, the country’s debts end up piling up faster than it can pay them off.

A spending bill to reopen the government through Feb. 15 removed the looming risk of the five-week partial shutdown having a broadening impact on the U.S. economy.

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