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  • Washington Highlights

    CBO Warns Federal Budget Deficit will Increase in 2016

    Tannaz Rasouli, Sr. Director, Public Policy & Strategic Outreach

    In a summary of its annual Budget and Economic Outlook released Jan. 19, the Congressional Budget Office (CBO) projects the federal budget deficit in 2016 will grow to $544 billion, an increase of $105 billion over last year.

    CBO notes this will mark the first time since 2009 that the deficit will increase as a percentage of the gross domestic product (GDP).

    The current projection for the 2016 deficit is $130 billion higher than what CBO projected in August 2015. CBO largely attributes this increase to legislation enacted since August—in particular, the retroactive extension of a number of provisions that reduce corporate and individual income taxes.

    CBO projects federal spending to rise to $3.9 trillion this year, a six percent increase. That increase is the result of a nearly seven percent rise in mandatory spending, a three percent increase in discretionary (appropriated) outlays, and a 14 percent increase in net interest spending.

    CBO anticipates that mandatory outlays will be $168 billion higher in 2016 than they were last year. A significant component of that growth is due to Social Security outlays, which are expected to increase by about $28 billion (three percent).

    Federal spending for the major health care programs accounts for a much larger fraction—more than 60 percent—of the projected growth in mandatory spending. Outlays for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, plus subsidies for health insurance purchased through exchanges and related spending, are expected to be $104 billion (11 percent) higher this year than they were in 2015.

    CBO projects discretionary outlays to be $32 billion higher in 2016, largely as a result of the Bipartisan Budget Act of 2015 (Public Law 114-74), which increased statutory limits on discretionary funding. According to CBO’s estimates, discretionary outlays for national defense—in their first increase in five years—will edge up slightly this year, and nondefense discretionary outlays will increase by four percent.

    The substantial increase that CBO expects in net interest spending, $32 billion, results from two factors; interest rates are beginning to rise, and federal debt is growing. But interest rates remain quite low by historical standards, so net interest spending is anticipated to equal only 1.4 percent of GDP in 2016, still well below its 50-year average of two percent.

    In CBO’s baseline projections, which assume that current laws will generally remain the same,  growth in spending, particularly for Social Security, health care, and interest payments on federal debt, will outpace growth in revenues over the coming 10 years.

    CBO projects the budget deficit to increase modestly through 2018 but then start to rise more sharply, reaching $1.4 trillion in 2026. The projected deficits would push debt held by the public up to 86 percent of GDP by the end of the 10-year period, a little more than twice the average over the past five decades.

    CBO noted it released the summary a week in advance of the full report to aid the Congress in its work on the FY 2017 budget resolution.

    CBO will release the full report Jan. 25.