This afternoon, the Congressional Budget Office (CBO) released its annual Budget and Economic Outlook for fiscal years 2013 to 2013. Its baseline budget for FY 2013 is for a deficit of $845 billion. This would be lower than the $1.1 trillion deficit experienced in FY 2012, and it would be the first sub-$1 trillion deficit since FY 2008. Despite this progress, the debt projections for the next ten years are not encouraging, with the budget never balancing and debt held by the public at historically high levels.
The deficit is currently estimated to fall to $430 billion by FY 2015 before rising again over the course of the rest of the decade, peaking at almost $1 trillion again by FY 2023. The latter rise is the result of the increasing cost of mandatory outlays, which are expected to grow from $2.0 trillion in FY 2012 to $3.7 trillion in FY 2023.
Regarding economic growth, CBO estimates that real GDP will increase just 1.4 percent in 2013, down from the estimated 1.9 percent. (This budget was prepared before last week’s GDP release, which found that real GDP rose 2.2 percent in 2012.) The reason for the lower growth this year is this:
That slow growth reflects a combination of ongoing improvement in underlying economic factors and fiscal tightening that has already begun or is scheduled to occur—including the expiration of a 2 percentage-point cut in the Social Security payroll tax, an increase in tax rates on income above certain thresholds, and scheduled automatic reductions in federal spending. That subdued economic growth will limit businesses’ need to hire additional workers, thereby causing the unemployment rate to stay near 8 percent this year, CBO projects. The rate of inflation and interest rates are projected to remain low.
CBO is more optimistic about growth in the 2014 to 2018 time frame, with 3.4 percent growth in real GDP next year and an average of 3.6 percent growth in the four years beyond that. With that said, as noted in the above passage, the unemployment rate is expected to improve very slowly. The current forecast is for the unemployment rate to fall to 7.6 percent by the end of 2014, with a 5.5 percent rate by 2018.
There are some unknowns that could impact this outlook. CBO notes the three upcoming “cliffs” that could impact the budgetary situation as well as economic growth. These budgetary deadlines include the across-the-board federal budget cuts currently slated for March 1, the expiration of the continuing resolution on March 27, and the statutory debt ceiling limit in mid-May. Manufacturers are closely watching these deadlines, as well, with each of them adding a degree of uncertainty to the marketplace in the first half of this year.
Chad Moutray is chief economist, National Association of Manufacturers.