U.S. Federal Deficit Spending Falls at Accelerating Rate

The U.S. Federal budget deficit is declining at a faster pace than previously projected, according to a new report by the Congressional Budget Office.

Due to cost-cutting after the so-called “fiscal cliff” in January 2013, in which Federal budget cuts automatically went into effect, the U.S. government’s deficit has shrunk to $506 billion on an annual run rate in 2014. According to the CBO, this shortfall is 25% smaller than it was in 2013, and will account for 2.9% of the nation’s GDP.

The U.S. Federal budget deficit is declining at a faster pace than previously projected, according to a new report by the Congressional Budget Office.

Due to cost-cutting after the so-called “fiscal cliff” in January 2013, in which Federal budget cuts automatically went into effect, the U.S. government’s deficit has shrunk to $506 billion on an annual run rate in 2014. According to the CBO, this shortfall is 25% smaller than it was in 2013, and will account for 2.9% of the nation’s GDP.

This deficit is smaller than the 40 year average deficit, and is expect to shrink even further. According to the CBO, “the agency has significantly lowered its projection of growth in real GDP for 2014, reflecting surprising economic weakness in the first half of the year.” According to economists at the CBO, the deficit will continue to fall over the next five years, and will remain at or below 3% of GDP until 2019. At that point, the CBO believes the deficit may bottom and begin to increase.

Declining from Peak

The Federal deficit spiked at nearly 10% of GDP in 2009, up from above 3% of GDP a year prior. The deficit has fallen every year since Barack Obama took office, with its steepest declines in 2012 and 2013. While the deficit as a portion of GDP is expected to rise slightly in 2016, it is expected to remain stable for the next five years.

Federal outlays have risen by almost 2% in 2014 from the prior year, which was more than offset by a revenue increase of over 8% from the prior year. Publicly held-debt is also projected to rise in 2014 by 3.3%.

Discretionary, Defense Spending Falls

Defense spending leads other categories in spending cuts, with a 5% decline in spending compared to 2013. At the same time, the CBO projects that discretionary spending in total will fall 3% thanks to defense cuts; nondefense discretionary spending is expected to be roughly flat from the prior year.

Federal spending on unemployment compensation will see the largest spending cut, with almost a 40% drop in year-over-year outlays as unemployment extensions fully expire and unemployment rates fall from a combination of decreased labor participation or increased job growth.

In total, the Federal government’s outlays rose to $3.5 trillion in 2014 and are projected to top $4 trillion in 2017. Those increases are largely due to Medicaid and Social Security, the government’s largest programs. The CBO projects a 15% year-over-year increase in Medicaid spending and a 5% increase in Social Security spending in 2014. At the same time, Medicare will only see a 2% increase in 2014.

Debt to GDP Ratio Steady

The CBO sees modest increases in the nation’s debt-to-GDP ratio, which is currently at 74%. The CBO believes that the ratio will fall in the coming five years, but will begin to rise to 77% in 2024. The debt-to-GDP ratio rose in 2008 in George W. Bush’s last year of presidency, as asset purchasing programs grew government spending from 35% in 2007 to over 40%. That ratio has risen every year since Barack Obama was sworn into office, buoyed by various asset purchasing programs and government stimulus programs.

The CBO warns that growing Federal debt will have “serious negative consequences”, including greater spending on interest, restrained long-term economic growth, less flexibility for policymakers, and “eventually increasing the risk of a fiscal crisis” that would cause rates on U.S. Treasuries to rise.

However, the CBO also believes that GDP growth is expected to accelerate to 3.4% from 2014 to 2016, while projecting inflation to remain stable at or below 2%. The CBO also expects 10-year Treasury rates to rise beginning in 2014, reaching 4.7% by 2018.