US Economy
US budget deficit to fall to 2.6% of GDP in 2015
By Michael Hennigan, Finfacts founder and editor
Jan 28, 2015 - 6:36 AM

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Real US GDP rose an average of 3.4% per year from 1960 through 2007, according to economists at ratings agency Standard & Poor's. They said in 2010 that they expected growth to average only 2.6% over the following decade. This week the CBO said growth will average 2.5% in 2014-2018.

The US Congressional Budget Office (CBO) estimates that the federal deficit for this fiscal year ending on September 30 2015, will amount to $468bn, slightly less than the deficit in 2014. At 2.6% of GDP, this year’s deficit is projected to be the smallest relative to the nation’s output since 2007 but close to the 2.7% that deficits have averaged over the past 50 years.

The bipartisan agency said that although the deficits in its baseline projections remain roughly stable as a percentage of GDP through 2018, they rise after that. The deficit in 2025 is projected to be $1.1tn, or 4.0% of GDP, and cumulative deficits over the 2016–2025 period are projected to total $7.6tn.

CBO expects that federal debt held by the public will amount to 74% of GDP at the end of this fiscal year—more than twice what it was at the end of 2007 and higher than in any year since 1950. By 2025, in CBO’s baseline projections, federal debt rises to nearly 79% of GDP.

A rise in ageing in the US will trigger increases in Medicare, Medicaid and Social Security spending.

“The past will catch up to us no matter how fast we run from it,” said Senator Michael B. Enzi, Republican of Wyoming, the new chairman of the Senate Budget Committee.

Last August, CBO projected real GDP growth averaging 2.7% per year for 2014 through 2018; CBO now anticipates that real GDP growth will average 2.5% annually over that period.

The revision mainly reflects a reduction in CBO’s estimate of potential output and therefore of the current amount of slack in the economy. On the basis of the current projection of potential output, CBO now forecasts that real GDP in 2024 will be roughly 1% lower than the level estimated in August. In addition, the sharper-than-anticipated drop in the unemployment rate in the second half of last year caused CBO to lower its projection of that rate for the next few years.

By CBO’s projections, increased hiring will reduce the unemployment rate from 5.7% in the fourth quarter of 2014 to 5.3% in the fourth quarter of 2017, which is close to the expected natural rate of unemployment (that is, the rate arising from all sources except fluctuations in the overall demand for goods and services). That increased hiring will also encourage more people to enter or stay in the labor force, boosting the labor force participation rate (which is the percentage of people who are working or actively looking for work).


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