The economy is expected to grow modestly over the next decade while deficit spending is likely to increase to dangerous levels, according to a federal outlook Tuesday.
The Congressional Budget Office (CBO) looked at several potential changes as part of its ten-year economic outlook. It expects economic growth to be positive but modest over the next decade. Deficit spending is also expected to increase more rapidly in the years ahead due to spending outpacing revenue.
“After declining for several years, federal budget deficits are on a path to rise during the next decade,” the report said. “Those shortfalls are projected to occur mainly because, under current law, growth in revenues would be outpaced by growth in spending for major benefit programs.”
Deficit spending is different from debt in that it’s the excess of expenditure over a given time. Spending that outpaces revenue adds to the deficit and thus will contribute to the debt. The CBO attributes this excess spending primarily to retirement and health care programs along with federal debt interest payments.
“Such a pattern over the next 10 years would cause debt held by the public to increase from 77 percent of GDP at the end of both 2017 and 2018 to 89 percent at the end of 2027,” the report said. “Such high and rising debt would have significant consequences, both for the economy and for the federal budget.”
The CBO highlights several problems that could occur because of the increased debt. Federal spending on interest payments would increase, capital stocks could become smaller, and lawmakers would have less flexibility to respond to sudden changes. A national fiscal crisis will also become more likely.
The CBO outlook does highlight some good news in that economic growth is also expected to occur. The report foresees an increase in economic output, which is the total value of all goods and services produced in an economy. The growth, however, is expected to be modest relative to the already sluggish growth seen since the last recession.
“The economy will grow, during the coming decade, at roughly the modest rate,” the report said. “CBO expects business investment to strengthen, helping to raise the growth of output to 2.3 percent this year and 1.9 percent in 2018. From 2017 to 2027, CBO estimates that real output will expand at an average rate of 1.9 percent per year.”
The expected growth is likely to result in other positive economic trends. It could cause employment to rise and is expected to eliminate slack. Slack is a measure which tracks unused productive resources in an economy. Much of the growth stems from an increase in labor productivity.
“The agency projects growth in the productivity of the labor force to accelerate nearly to its average over the past 25 years,” the report said. “Nevertheless, the growth of potential output is projected to be slower than its long-term historical average because the working-age population, and hence the labor force, are expected to grow more slowly than they did in the past.”
The labor force has improved significantly since the last recession. It has even managed to reach close to full employment at 4.7 percent. The slow growth and other market indicators, however, have shown there is plenty of room for improvement.
“The modest increase in economic output during 2016 was enough to ensure that labor markets kept improving,” the report said. “Payrolls grew by 180,000 jobs per month, on average. The labor force participation rate increased slightly in 2016, even though the aging of the population exerted downward pressure on it.”
The labor force participation rate tracks the number of employed and those actively seeking work as a percentage of the total population. It has fallen considerably since the last recession even with the steady job growth in recent years. It was able to rebound some in the last year but not enough to reverse the overall trend.
The CBO expects that participation rate to continue its downwards trend in the decade ahead as more people drop out of the labor force. The decline is primarily due to a large percentage of people retiring. Additionally, more people have been relying on entitlements, like disability insurance, instead of work.
The CBO notes the projections are subject to change because it’s based on current laws and trends. President Donald Trump has pledged to reduce government spending and spur economic growth. He could make things better or worse but at the very least any significant changes are likely to alter the projections.
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