Sunday, August 30, 2009

The harsh realities of the federal budget deficit

As a quick follow-up to Krugman's comments on the escalating federal budget deficit, here is the updated report from the Congressional Budget Office. The recent spike in budget deficit (chart below) is only the beginning.

CBO is forecasting a continuing budget deficit with no possible way to close the gap. It's a truly sobering projection. From CBO:
CBO estimates that, as the economy recovers, if current laws and policies remained in place, the deficit would shrink but remain above $500 billion per year, or more than 3 percent of GDP, throughout the 2010–2019 period. As a result, debt held by the public would continue to grow as a percentage of GDP during that time. That debt, which was as low as 33 percent of GDP in 2001, would reach an estimated 54 percent of GDP this year and grow to 68 percent of GDP by 2019.

And this projection hinges on a steady GDP growth in the next ten years. Without such GDP growth, the budget gap will look significantly worse. Here is their latest GDP projection. It could turn out to be much too optimistic.

See the full CBO report below: