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April 9, 2018
2018-0763

CBO forecasts higher deficits, debt due to TCJA and spending bills

The federal budget deficit will exceed $1 trillion annually beginning in FY 2020 — two years earlier than previously projected — and federal debt held by the public will approach 100% of GDP by 2028, according to the Congressional Budget Office (CBO) Budget and Economic Outlook released on April 9, 2018.

CBO projected an FY 2018 deficit of $804 billion — $242 billion larger than it last projected in June 2017 and $139 billion more than the actual deficit for FY 2017 — and a cumulative deficit for the 2018–2027 period of $11.7 trillion, $1.6 trillion larger than the $10.1 trillion previously projected.

The increase in projected deficits stems primarily from tax and spending legislation enacted since June 2017 that significantly reduced revenues and increased outlays: the Tax Cuts and Jobs Act (TCJA); the Bipartisan Budget Act of 2018 that increased the caps on discretionary funding in 2018 and 2019 and provided substantial funding for emergency disaster assistance; and the Consolidated Appropriations Act, 2018 that provided appropriations for 2018. The release of this year's CBO report was delayed to incorporate the effects of those laws.

Most of the deficit increase for FY 2018 is attributable to a $194 billion reduction in projected revenues, mainly because the TCJA is expected to reduce collections of individual and corporate income taxes, CBO said. For the 2018–2027 cumulative deficit, CBO projected revenues that are lower by $1 trillion and outlays that are higher by $500 billion: the reduction in projected revenues stems primarily from the lower individual income tax rates under the TCJA, and the increase in outlays is mostly because the other two pieces of legislation will increase discretionary spending.

CBO said that, spurred by fiscal stimulus, real GDP growth is expected to be 3.3% in FY 2018 before falling to 2.4% in FY 2019. Real GDP is expected to grow at an average annual rate of 1.9% over the 2018–2028 period.

The report said deficits and debt would be even larger if some major policies now in place were continued:

— Extending individual income tax and estate tax reductions under the TCJA, slated to expire in 2025, would increase the deficit by $650 billion over the 2019–2028 period

— Extending expensing at 100% — under current law, full expensing lasts through 2022 before phasing down over the 2023–2026 period — would increase deficits by $122 billion over the 2019–2028 period

— Permanently repealing the medical device excise tax, the excise tax on high-cost employment-based health care coverage ("Cadillac Tax"), and the annual fee on health insurance providers would reduce revenues by a total of $324 billion over the 2019–2028 period

— Permanently extending roughly 30 tax extender provisions that are expired as of the end of 2017, plus a number of trade programs that are scheduled to expire between 2020 and 2026 that affect customs duties, would cost $85 billion over the 2019–2028 period

"In total, if all of those tax provisions were permanently extended, CBO and JCT estimate, revenues would be lower by a total of $1.2 trillion over the 2019–2028 period," CBO said.

Health care

Federal outlays for the major health care programs — Medicare, Medicaid, subsidies offered through the health insurance marketplaces established under the Affordable Care Act and related spending, and the Children's Health Insurance Program (CHIP) — are projected to grow from 5.3% of GDP in 2018 to 6.6% in 2028, mostly attributed to growth in Medicare spending driven by an aging population and increasing health costs.

A provision of the TCJA that eliminated the penalty related to the individual health insurance mandate (beginning in 2019), accounts for the largest reduction in mandatory outlays for the 10-year period, estimated to reduce out­lays by $297 billion over the 2018–2027 due to fewer people enrolling in federally subsidized health insurance.

Outlays for health insurance subsidies and related spending are also estimated to increase by $10 billion (or 21%) in 2018, due to a 34% average increase in premiums for the second-lowest-cost "silver" plan in health insurance marketplaces established under the ACA, growing from $58 billion in 2018 to $91 bil­lion by 2028.

Additionally, CBO projects receipts from health care taxes — including excise taxes imposed on many health insurers, a tax on manufacturers of brand-name drugs, the medical device tax and the "Cadillac Tax" on high-cost health plans — to grow from $18 billion in 2018 to $39 bil­lion in 2028.

The report is attached.

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