Last week, the Congressional Budget Office (CBO) released its new 10-year budget and economic outlook. The report, normally published in January, was pushed back this year to April to give the CBO time to analyze new legislation, including the Tax Cuts and Jobs Act. The CBO report includes projections of government spending, revenue, deficits, and debt as well as the new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. law’s impact on deficits and economic growth.
There are three key takeaways from the report:
1) The CBO projects that the gap between government spending and revenue will be persistently large, causing federal debt to rise to nearly 100 percent of GDP.
In the 10-year period from 2019-2028 government outlays are projected to total $56.5 trillion and revenues $44.2 trillion. These projections assume that the temporary provisions of the Tax Cuts and Jobs Act (TCJA) will expire as scheduled, including significant portions of the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. reductions. In 2018, the CBO projects a deficit of $804 billion, with deficits generally increasing in the following years, pushing debt held by the public to nearly $29 trillion by 2028.
2) The CBO thinks that the 2017 tax act will grow the size of the economy:
In CBO’s assessment, the 2017 tax act changes businesses’ and individuals’ incentives in various ways. On net, those changes are expected to encourage saving, investment, and work. In CBO’s projections, it boosts the level of real GDP by an average of 0.7 percent and nonfarm payroll employment by an average of 1.1 million jobs over the 2018–2028 period.
3) The CBO projects that the Tax Cuts and Jobs Act will increase the projected deficit by $1.9 trillion over the 2018-2028 period.
The report projects that the TCJA, the Bipartisan Budget Act of 2018, and the Consolidated Appropriations Act will exert upward pressure on interest rates and prices. My colleague Steve Entin discusses the new tax law’s interactions with the interest rate and deficit here, noting that “rising interest rates stemming directly from the growth provisions of the tax reform bill would be a positive sign that the tax cut is working to encourage capital formation, and should not be cause for alarm.”
Overall, the report projects that the gap between government spending and revenue will remain large over the next decade and that federal debt will increase. The CBO projects that GDP growth will be relatively strong the next two years before moderating, and note that it will be greater than projected in its last report due in part to the Tax Cuts and Jobs Act.
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