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  The New "Official" Deficit Outlook
Posted Under: Data Watch • GDP • Trade

Yesterday, the Congressional Budget Office released its annual mid-year update of the US budget situation (link).   CBO now projects this fiscal year's budget deficit, which ends September 30, to be $1.284 trillion,or 8.9% of GDP.  This compares to a deficit estimate of $1.399 trillion back in March.  Most of the "improvement" is due to individual income tax revenue coming in higher than expected.

For Fiscal Year 2012, which starts October 1, CBO estimates the deficit will come in at $973 billion, or 6.2% of GDP.  Back in March, CBO was estimating this deficit would be $1.081 trillion.  Some of improvement in the deficit outlook for FY 2012 is due to the recent budget compromise, which will reduce discretionary (non-entitlement) outlays by $27 billion.  However, once again, the lion's share is due to a better outlook for individual income tax revenue.

Over the ten year period covering 2012- 2021, CBO estimates total deficits will log in at $3.5 trillion rather than the $6.7 trillion assumed back in March.  Of this improvement, about $2.3 trillion is due to the budget compromise, including:

(1)   caps in discretionary spending

(2)  the budget "sequester" that will happen if the bi-partisan special committee tasked with forging long-term budget cuts doesn't reach an agreement, and

(3)   interest savings from the budget cutsnoted in (1) and (2). 

In addition, the CBO assumes some budget savings by projecting lower interest rates and inflation than it assumed in March as well as slightly higher individual tax revenue.


Ultimately, a long-term sustainable fiscal path requires reforms for Social Security, Medicare, and Medicaid. However, assuming Congress and the President abide by the recent budget agreement for the next decade, CBO projects budget deficits starting in 2014 would hover between 1% and 1.6% of GDP, which is quite low by historical standards.  Assuming the tax cuts of 2001 and 2003 are extended, and also assuming no positive feedback effects for the economy, the deficits would hover between 2.6% and 3.2% of GDP over the same time frame, larger but still manageable.
Posted on Thursday, August 25, 2011 @ 8:56 AM • Post Link Share: 
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