CBO raises US 2024 budget deficit forecast by 27% to nearly $2 trillion

According to the financial news app Zhitong Finance, the non-partisan Congressional Budget Office (CBO) of the United States has raised its forecast for this year's U.S. budget deficit by 27%, reaching nearly $2 trillion, sounding a new alarm bell for the unprecedented trajectory of federal borrowing.

According to the latest forecast released by the Congressional Budget Office in Washington on Tuesday, the deficit in 2024 is expected to reach $1.92 trillion, higher than the $1.69 trillion in 2023. The new estimate is more than $400 billion higher than the CBO's February expectations, reflecting additional spending since then, including aid to Ukraine and the Biden administration's student loan forgiveness measures.

In the economic forecast supporting the fiscal outlook, the CBO currently believes that the U.S. economy will grow faster this year and inflation will be higher. The Federal Reserve will pause rate cuts until the first quarter of 2025, while the CBO had already set a timetable for rate cuts in mid-2024 back in February. The CBO's economic forecast was completed before the Fed's most recent meeting in early May.

In terms of the share of Gross Domestic Product (GDP), the U.S. deficit in the 2024 fiscal year (ending in September) is expected to expand rather than shrink. The ratio is projected to be 6.7%, compared to 5.3% in February and a record of 6.3% in 2023.

In contrast, the EU countries aim to keep the deficit rate at 3% or below. According to CBO data, the average deficit rate in the U.S. over the past half century has been 3.7%.

In the new forecast, the CBO states, "From 2024 to 2034, the annual deficit will equal or exceed 5.5% of GDP each year. At least since 1930, the deficit has never been maintained at such a large scale for more than five consecutive years."

Tuesday's forecast continues to show that U.S. debt relative to GDP will reach record levels, and interest costs will continue to rise, with interest costs this year exceeding defense spending. The CBO believes that the total U.S. deficit over the next decade will reach $22.1 trillion, an increase of over $2 trillion from the February report.

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, said before the CBO report was released, "Every legislator and presidential candidate should propose solutions and commit to no longer borrowing new debt except in actual emergencies."

As for the deterioration in the 2024 forecast compared to the February report, the CBO cites the following reasons:

President Biden's student loan forgiveness plan has added $145 billion to the deficit. In addition, Congress passed bills providing aid to regions such as Ukraine and Israel, increasing discretionary spending by $600 billion. The Federal Deposit Insurance Corporation expects to recover $70 billion from bank failures in 2023 and 2024 Medicaid spending is expected to increase.

The CBO stated that the U.S. economic growth is higher than a few months ago, which will lead to income growth, but this positive trend is overshadowed by the above trends. The office now expects that the GDP in the fourth quarter of 2024 will increase by 2% year-on-year, higher than the 1.5% in February.

The preferred inflation indicator by the Federal Reserve, the PCE price index, is at 2.7%, compared to the previous forecast of 2.1% in February. In the first three months of this year, the Consumer Price Index (CPI) also exceeded the expectations of many economists, but current data shows that price pressures eased in May.

The CBO indicates that Federal Reserve policymakers are expected to start cutting interest rates next year, with the benchmark rate expected to fall to 3% by the end of 2028 and remain stable thereafter. The median of the long-term interest rate estimate updated by Federal Reserve officials last week is 2.8%. The current target median is 5.33%.

Immigration Outlook

Although accelerated immigration helps promote economic growth and fiscal revenue, the United States still faces a huge deficit. The CBO believes that the immigration wave will continue until 2026. According to the office's estimates, this trend will reduce the total deficit by about $900 billion over the next decade.

The CBO's forecast is based on current legislation, including an assumption that, taking inflation into account, the $950 billion foreign aid package enacted in April will increase disposable spending by $950 billion annually in the future.

This also includes the expectation that several tax cuts by former President Trump are scheduled to expire by the end of next year. The CBO additionally estimates that extending these provisions could add $4.6 trillion to the deficit.

House Budget Committee's top Democrat Brendan Boyle said, "Even though today's forecasts show the fiscal consequences of the Republican tax cuts for the wealthy, they are still trying to further expand the deficit by spending $4 trillion. Republicans will continue to pursue their stale 'trickle-down' plan, while Democrats will continue to strive to reduce costs and invest in America."

White House Press Secretary Karine Jean-Pierre told reporters, "The President will continue to do everything he can to do the right thing in reducing the deficit."