December 3, 2018

The Congressional Budget Office recently released its budget deficit forecast for the period from 2018-2028  The budget deficit for fiscal year 2018 came in at $779 billion.  For the current fiscal year (FY 2019)  the budget deficit is projected to be $1.1 trillion.  It will remain above the $1.0 trillion throughout the entire 10-year budget forecast as more and more baby boomers retire and begin to draw Social Security and become eligible for Medicare.  By 2028 it is expected to be $1.5 trillion.

It is important to remember that the U.S. actually had modest budget surpluses in FY’s 2000 and 2001.  And from 2002 to 2007 the deficits were consistently in a range from $200-300 billion.  The recent widening of the deficit  was largely the result of the extraordinarily deep recession that lasted from the end of 2007 through mid-2009.

The best way to determine whether a deficit is “big” or “small” is to look at the deficit in relation to the size of the economy, or the deficit as a percent of GDP.  Over the course of the past 50 years, the budget deficit as a percent of GDP has averaged about 3.0%.  This should be regarded as a “sustainable” deficit.  Unfortunately, by 2028 — a decade from now — the deficit will  climb to 5.0% of GDP.  That is too large and if something goes wrong it could be even bigger.  The goal should be to shrink it to no more than 3.0% of GDP during the course of the next decade.

While the normal budget forecasting cycle is 10 years, if one looks just beyond that 10-year horizon the situation gets significantly worse.  If nothing is done to correct the situation by 2038 the annual budget deficits will climb to 7.0% of GDP.

Stephen Slifer

NumberNomics

Charleston, SC