Govt.

U.S. Deficit to Hit $1 Trillion By End of Year, 2 Years Early

The bipartisan Congressional Budget Office just announced the U.S. deficit will hit $1 trillion by the end of 2018, as tax cuts and spending increases prove to do almost nothing to help long-term economic growth.

The Congressional Budget Office (CBO) released a new up-to-date report this week on how deeply tax cuts and out-of-control spending increases are damaging the deficit. The news is grim.

The deficit is now expected to hit $1 trillion by the end of 2018.

That is two years earlier than the last CBO report on the subject on April 9, 2018. Then, based on analysis to date considering projected tax revenue shortfalls from the Tax Reform Act passed in late 2017, increased spending plans in the Congress, plus consideration of other factors in the economy, the CBO estimated the U.S. budget deficit would cross the $1 trillion threshold sometime in 2020.

That report noted that Congressional spending would run about $804 billion over expected incoming revenues through the end of the 2018 fiscal year ending in September. It also included a roughly $300 billion spending increase the Republicans and Trump approved earlier this year. It included a warning about the possible U.S. impacts of what looked -- even then -- like the beginning of major tariff wars Trump would launch against the rest of the world. That was not figured in financially to any major extent. It was only noted that tariffs would make the deficit worse.

Within the April forecast was an estimate that the real gross domestic product (GDP) would grow by 3.3 percent in 2018, then slow to 2.4 percent in 2019 and 1.8 percent in 2020. That contrasts with the Trump 2019 budget request information, which said the tax cuts would kick the economy into high gear. The White House numbers said the economy would grow by 3.1 percent in 2018, then stay above 3 percent through 2024.

In the report on September 11, 2018, the Congressional Budget Office painted a far more dismal picture of what was really happening. It reported that the federal budget deficit climbed to $895 billion for the first 11 months of fiscal 2018. That’s a $222 billion increase, or 32 percent, increase year-to-year. This latest report showed that the combined effect of the Republican tax cuts and spending increases the Republicans also pushed through raised total expenditures this fiscal year by 7 percent while revenues grew only by 1%.

Budget Totals, October-August

Billions of Dolllars

 

Actual, FY 2017

Preliminary, FY 2018

Estimated Change

Receipts

2,966

2,985

  19

Outlays

3,640

3,880

 240

Deficit (-)

  -674

  -895

-222 (rounded)

Sources: Congressional Budget Office; Department of the Treasury. Based on the Monthly Treasury Statement for July 2018 and the Daily Treasury Statements for August 2018.

FY = fiscal year

Expenditures by the Department of Defense rose by 6% to $33 billion during this period. The Department of Homeland Security also increased its outlays by $21 billion, mostly related to disaster relief activities. The DHS increases are of special note as the most dangerous parts of the U.S. hurricane season, including the potential devastating effects of Hurricane Florence as it closes in on the North Carolina/South Carolina coast at this moment.

The revenue shortfall came from the government receiving $105 million more in individual and payroll taxes than last year, minus $71 billion less (a 30% drop) received in corporate taxes. The revenue shortfall was accelerated through a combination of the “lower [corporate] tax rate and the expanded ability to immediately deduct the full value of equipment purchases”. The CBO also reported that public debt interest also soared during this period by 19%, or $55 billion. With the much higher deficits now being reported even earlier than past estimates, that debt interest will continue to increase at a rapid clip.                            

Another consideration in the calculations and projections made by the CBO in this latest report relates to potential inflationary effects. As the corporate tax cuts dig in, federal spending increases, and both corporations and consumers end up spending more on imported goods and services because of Trump’s tariffs, that will cause two problems. It risks overstimulation of the economy and increasing inflationary pressures across the country. The Fed’s slow response to curbing those inflationary pressures could end up forcing it to attempt to rein in the surging economy with larger-than-normal interest rate increases.

When all that happens, the economy could end up lurching to a faster slowdown than previously expected. Such a slowdown could trigger other impacts, including consumer spending cutbacks as individuals can afford less and are more fearful for their jobs. Corporations might not be in trouble financially because they still have the corporate tax cuts, but they could retain more earnings in lieu of investing more to expand their own businesses.

Add in a rumored last-minute additional tax cut the Republican Congress may pass just before the November mid-term Congressional elections, and this could be the beginning of a very rough ride for the U.S. economy ahead.