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Turn for the worse

File this one under “No Big Surprise.”

In the Congressional Budget Office’s new update of its budget and economic outlook, its projections show the U.S. budget deficit as a percentage of gross domestic product will grow in 2016 for the first time since 2009. And the picture gets progressively worse over the next decade. So much for incredible shrinking deficit, as it’s been called.

When the deficit was roughly $1.3 trillion and 8.7 percent of GDP in 2010, few economists predicted those figures would drop so dramatically. But they did—in 2015, the budget gap was $439 billion, or 2.5 percent of GDP.

A range of factors caused this turnaround. Sequestration spending cuts played a role; so did individual and corporate tax revenues that were higher than expected as the economy strengthened and an increase in Fannie Mae and Freddie Mac’s dividend payments to the U.S. Treasury.

But even as the deficit plummeted, the CBO warned this trend was not sustainable.

In its new report, assuming current laws generally remained unchanged, the CBO projects the deficit “would grow over the next 10 years, and by 2026 it would be considerably larger than its average over the past 50 years.

Growing deficits mean an even bigger debt load. By the end of fiscal 2016 in September, federal debt held by the public will reach an estimated 76 percent of GDP—up two percentage points in one year—and after 10 years would hit 86 percent of GDP. Prior to the Great Recession, it was around 35 percent.

While the CBO has warned all along that things would turn for the worse, its outlook has dimmed further because of the Bipartisan Budget Act passed near the end of last year. Rather than heed CBO’s warnings, Congress and the president ordered up more spending.

It’s no secret what lawmakers should do if they want to act responsibly: work together to enact a long-term budget agreement that includes a sound plan for fiscal reform.

Unfortunately, in the current political climate there’s almost no chance of that happening. We are all likely to pay the price later.

1/29/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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