CBO forecasts poor economy and rising deficits in 2023

TThe bipartisan Congressional Budget Office released an analysis Nov. 29 describing its “current view of the economy in 2023-2024 and the budget implications.” In short, things are looking bleaker than they were just over six months ago when the CBO published its budget and economic outlook in May.

In the May report, the CBO forecast that economic output would grow by 2.2% in 2023. The latest CBO update suggests there’s only a 1 in 6 chance the economy will grow more than 1.8%, and that’s about as likely as not for the economy to contract in 2023.

The CBO now expects the unemployment rate to rise in 2023. The report suggests that unemployment will rise to between 3.8% and 6.4%, meaning that next year there will be between a few hundred thousand and about 4.5 million more Americans out of work than today.

How about inflation? The inflation picture is also less optimistic.

The CBO previously forecast that inflation would fall close to the Federal Reserve’s 2% target by 2023. Now the Budget Office isn’t so sure. The latest CBO report puts the most likely range for inflation in 2023 between 1.8% and 4.6%. In other words, inflation will likely be lower than 2021 or 2022, but likely worse than any other year in the past decade or three.

And because inflation has proven to be a more persistent problem than many economists expected, the Federal Reserve has responded with larger rate hikes than the CBO had previously anticipated. The CBO now expects 3-month Treasury bills to pay between 3.4% and 5.6% interest in 2023, well above the 2.0% they forecast in May 2023.

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This has a huge impact on national debt. The CBO now estimates that the deficit in 2023 will be between 20% and 30% higher than the May forecast, based solely on revised estimates of gross domestic product, unemployment, inflation and interest rates. That doesn’t even take into account new legislation that has pushed up the deficit since the last forecast.

The CBO noted that higher-than-expected interest costs were the main reason for the dramatic increase in deficit expectations. This should raise serious red flags for federal lawmakers.

When just a few months of higher-than-expected interest rates are the driving factor for an upward revision of the deficit by $200 billion to $300 billion next year, it shows how dependent the federal government is on low interest rates to keep the debt and deficits even remotely under control.

Interest rates have been historically low – near zero – for almost 15 years. But with the recent burst of inflation, the Federal Reserve has tightened monetary policy and interest rates have risen. For a country with $31.3 trillion in debt — more than a quarter million dollars per US household — rising interest rates are worrying, to say the least.

Higher interest rates drive up the cost of servicing the already high national debt, leading to higher deficits every year. The faster growing debt then forces the state to pay interest on an even larger amount. All of this makes investors reluctant to hold US securities, which in turn makes them demand higher interest rates.

It’s not hard to see how this vicious cycle could spiral out of control if lawmakers and federal officials aren’t careful.

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May’s over-optimistic outlook projected that public debt would rise from 100% of GDP in 2021 to 185% of GDP by 2052. The November update shows that the situation is even worse. For context, in the run-up to his debt crisis in 2008
Greece had a debt ratio of around 127% of GDP. Greece’s debt crisis should serve as a warning to US lawmakers that it’s time for America to get a grip on our spending and debt problems while we still can.

The European Union and the International Monetary Fund stepped in to bail out the government and avert a default during Greece’s debt crisis, but the Greek economy was still in tatters. At the height of its debt crisis, Greece had an unemployment rate of almost 30%. Greece’s economy today is still almost 30% smaller than in 2007. The Greek downturn was even more severe and prolonged than America’s Great Depression.

Is a similar cataclysmic scenario inevitable for America? No, but debt doesn’t come free, and Americans will pay for it one way or another. And like a homeowner who neglects a crumbling foundation, disaster is far more likely if Washington chooses to ignore America’s growing spending and fiscal woes.

Yet that’s exactly what Congress seems inclined to do, and it’s not just one party looking to sidestep the graveyard work with the outgoing Democrats to pass another massive spending bill. House Republicans also voted against a ban on budget ends — Congressmen’s favorite tool for getting pet projects into their districts.

None of this bodes well for Americans, who were optimistic that divided government would halt America’s march toward financial ruin.

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This article originally appeared in Daily signal and is reprinted with permission from the Heritage Foundation.

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