The US budget deficit will surpass $1 trillion by 2020, two years sooner than previously estimated, largely due to tax cuts and spending increases signed by President Trump late last year and earlier this year – according to a new report from the Congressional Budget Office (CBO).
Federal spending will exceed revenue by $804 billion in the 2018 fiscal year through September, jumping from a projected $563 billion shortfall forecast in June, the non-partisan CBO said in its latest report on Monday. In fiscal year 2019, the deficit will reach $981 billion, compared with an earlier projection of $689 billion.
This is the first CBO forecast to take into account the recent tax cuts and spending legislation, and it’s clear that lawmakers have added significantly more debt on top of an already unsustainable trajectory. As you can see in the chart below, the annual budget deficits are projected to remain well above $1 trillion each year after 2020.
Our national debt is currently at $21.13 trillion versus our Gross Domestic Product of $19.9 trillion, thus putting the debt-to-GDP ratio at 106.3%, the highest since the end of WWII.
Let’s say we add an average of $1.25 trillion a year in debt over the period from 2019 to 2027; that means we’ll add over $11.2 trillion to the national debt over the next nine years, bringing the total to over $32 trillion. For the record, I don’t believe the markets will stand for that!
Fortunately, not all the news was bad in this week’s CBO report. The agency forecasts that real Gross Domestic Product will expand by 3.3% in the 2018 calendar year, up from 2.0% in its June report (before the tax cuts). But then the CBO has GDP slowing to 2.4% in 2019 and only 1.8% in 2020. The CBO believes the benefits of the tax cuts will be fleeting. That remains to be seen.
On interest rates, the CBO estimates that the Fed Funds rate will rise to 2.4% by the end of this year, up from roughly 1.7% today. The CBO expects the Fed Funds rate to rise to 3.4% by the end of next year and to peak at 4.0% by the end of 2021.
On jobs, the CBO forecasts that the unemployment rate, currently at 4.1%, will fall to 3.8% by the end of this year and to 3.3% by the end of next year. It will be interesting to see how these latest forecasts from the CBO play out. I’ll keep you posted.
Trump Trade Tariffs Punish Americans First
Ever since President Trump levied trade tariffs on steel and aluminum back in March, I have argued that such tariffs are bad for Americans, eventually even including those who work in the steel and aluminum manufacturing industries which stand to gain in the short-run. The main reason: tariffs result in higher prices for consumer goods for everyone.
When President Trump announced his initial $50 billion in tariffs on steel and aluminum, I warned that China would retaliate in-kind. They did and it took a toll on US stock markets. Despite that, President Trump threatened last Friday to up the China tariff ante by another $100 billion, although it is just a threat so far.
It’s not as if Trump doesn’t understand that higher tariffs could negatively impact the US economy – he does. He admitted as much last Friday when he said:
“I’m not saying there won’t be a little pain, but the [stock] market has gone up 40%, 42%, so we might lose a little bit of it. But we’re going to have a much stronger country when we’re finished.”
Unfortunately, there’s no guarantee of that, and there’s no guarantee that the current tit-for-tat tariff exchange between the US and China won’t turn into a real trade war.
In the meantime, much of the pain from China’s retaliatory tariffs will fall on American consumers in the form of higher prices. China has strategically targeted US agriculture, specifically the Farm Belt states (soybeans, corn, hogs, etc.) that Mr. Trump carried in 2016. It remains to be seen if that will doom the president’s re-election chances in 2020.
The point is, President Trump’s tariffs on China will hurt American interests first. They may eventually hurt the Chinese economy as well. Time will tell. The bottom line is, trade tariffs benefit no one. And a trade war, if it comes to that, is likely to spark the next recession.
Trump should know that protectionism benefits no one. But apparently, he doesn’t.
[…] 2018 to 2027. I’ve written about the findings of these new forecasts twice since then – in my Blog last week and again in Forecasts & Trends on Tuesday of this […]