After several years of fiscal progress, the federal budget deficit picture has worsened, according to a recent report from the Congressional Budget Office (CBO). For the first time since 2009, the annual deficit is projected to increase, in relation to the size of the economy, in 2016.
The budget deficit projected by the CBO is $130 billion more than the August 2015 projection of $426 billion.
Why did the budget deficit projection increase?
- While some of the increase can be attributed to the timing of some payments that will occur in FY2016 instead of FY2017, a larger portion of the increase is due to tax legislation signed into law in December that retroactively extends certain expiring tax provisions – some permanently
- Also, spending for mandatory government programs such as Medicare and subsidies for purchasing insurance via the health-care exchanges increased
- There were greater outlays for Social Security as well, even though recipients did not receive a cost of living adjustment for 2016
- Discretionary spending levels also increased with the passage of the Bipartisan Budget Act of 2015 which raised statutory limits on federal spending
Federal revenues are expected to rise by only 4% in 2016, with CBO projections indicating expenditures will outpace revenue for the next decade.
Growing deficits projected to drive up national debt
Even with the current economic growth, federal revenues will not keep pace with spending. At the same time, today’s average effective tax rates are significantly lower than 50 years ago.
If no legislative changes are enacted, the budget deficit will continue to grow over the next 10 years and drive up the debt held by the public to 86% of GDP by 2026, up from the current debt-to-GDP ratio of 76%.
The main drivers of this projected increase are higher interest rates and increased spending for Medicare and Social Security as more baby boomers retire. As a result of these fiscal pressures, individuals planning for retirement should prepare for the potential of higher income taxes and reduced benefits in the future. In fact, according to CBO projections, Social Security’s trust funds will be exhausted in 2029. At that time, the result would be a 29% reduction in benefits.