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Quick thoughts on the CBO budget and economic outlook

Earlier this week, I joined Romaine Bostick and Scarlet Fu Bloomberg TV. The Congressional Budget Office (CBO) had just released its annual Budget and economic perspectives: 2023-2033, forecast government spending, income, inflation, interest rates, unemployment, economic growth and more over the next decade. If you just want the summary, click here.

The report is mandated by the Congressional Budget Act of 1974, and the “baseline” that CBO builds as part of the exercise is important. a lot when it comes to determining, for example, whether future legislation it will encounter certain procedural hurdles due to its budgetary impacts. If you want to learn more about where the baseline comes from and how it is used in the legislative process click here.

The report captures this misleading image which invariably causes a lot of it unnecessary alarm i point the partisan finger. While Democrats point to the Republican tax cuts (George W. Bush and Donald Trump) and the wars in Iraq and Afghanistan, Republicans blame the Biden administration for spending too much on COVID relief and (now somewhat timidly) “entitlement” programs like Social Security and Medicare.

Readers of the lens know that I am not particularly alarmed or interested in projections like the one shown above. If you don’t know my views, this chapter from my book The deficit myth will catch you up.

To share

I’ll write more about the CBO report tomorrow, but suffice it to say (for now) that it was a strange report in many ways.

They tell us that “real GDP growth stalls in 2023 in response to the sharp rise in interest rates in 2022.”

As growth stalls, CBO predicts “labor market conditions will worsen” with unemployment rising to 5.1% by the end of this year and continuing to rise into early 2024.

Is CBO predicting a recession? I’ll let you be the judge. While they expect the economy to grow at a barely 0.1 percent this year, they don’t foresee a contraction in real GDP (at least not on average over the year).

Against this background, CBO predicts that inflation will fall quite precipitously this year and next “as pressures ease from factors that, since mid-2020, have caused demand to grow faster than offer”. But they see inflation staying above 2 percent until 2027.

In response to the economic slowdown, CBO predicts that the Fed will begin cutting interest rate sometime in 2024, several years before inflation returns to the Fed’s long-term target.

None of us should put too much stock in any long-term economic outlook. But the CBO’s economic outlook influences its (baseline) budget projections, which are important for policymaking of all kinds.

Assuming a bleaker economy (no growth, higher unemployment, stickier inflation, and more aggressive rate hikes in the near term (among other things), CBO tells lawmakers that projected deficits over 2023-2032 will be $900 billion more than before forecast (to May 2022).Part of this jump is due to projected debt service (revised to $295 million) during this period.

Keep that in mind, because I’ll be writing more about rate hikes and their budget impacts in my next post.

As always, thanks for reading the lens.


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