CBO Estimates Falling Deficits in 2012

If current fiscal policy is maintained, the federal budget deficit will dip slightly in 2012 before falling significantly in the coming years, according to a budget and economic outlook released Tuesday by the Congressional Budget Office (CBO).
by | January 31, 2012

If current fiscal policy is maintained, the federal budget deficit will dip slightly this year before falling significantly in the coming years, according to the 2012 budget and economic outlook released Tuesday by the Congressional Budget Office (CBO). State support under the stimulus package will continue to diminish and spending on programs such as Medicaid will maintain their dramatic rise.

The CBO report also says that annual deficits will remain in the $1 trillion range for the next several years if Bush-era tax cuts slated to expire in December are extended, as commonly assumed.

The report is yet another reminder of the perilous fiscal situation the government is in, but it's commonly assumed by President Barack Obama and lawmakers in Congress that little will be accomplished on the deficit issue during an election year.

The CBO forecast provides a benchmark for the president’s budget proposal and other policy changes introduced in Congress. It is based on the assumption that current laws will generally remain unchanged. For example, the projections assume that the Bush tax cuts are allowed to expire, Medicare physician reimbursement - the so-called doc fix - legislation is passed and the automatic spending cuts under the Budget Control Act are not enacted.

The outlook provides some guidance for states for programs that receive significant federal funding. Federal support for states under the American Reinvestment and Recovery Act (ARRA) will continue to drop, according to the CBO. Enhanced federal funding for Medicaid under ARRA ($12 billion in 2011) will almost evaporate to $1 billion in 2012. The State Fiscal Stabilization Fund, distributed through the U.S. Department of Education, will dwindle from $12 billion in 2011 to $5 billion in 2012. ARRA spending on transportation projects will decrease from $17 billion to $11 billion.

Overall federal spending on Medicaid will dip from $275 billion in 2011 to $262 billion in 2012, largely because of the reduction in enhanced ARRA support for states, but is expected to skyrocket to $605 billion by 2022, according to the CBO. Provisions in the Affordable Care Act (ACA) will increase the program’s population and the federal government’s spending for certain groups. Overall Medicaid enrollment is projected to increase from 67 million in 2011 to 95 million in 2022. Similarly, spending on the Children’s Health Insurance Program, which is administered by the states, is expected to remain steady at $9 billion from 2011 to 2012 before jumping to $12 billion by 2015.

The federally run benefit programs, Social Security and Medicare, are projected to balloon as the nation’s population ages: Social Security from $770 billion in 2012 to $1.3 billion in 2022; Medicare from $560 billion in 2012 to $1 billion in 2022. Medicare enrollment is expected to rise from 47 billion in 2011 to 66 billion in 2022; Social Security enrollment will follow a similar trend. Spending on health insurance subsidies, exchanges and other programs under the ACA will begin in 2013 at $1 billion before increasing to $17 billion in 2014, the first year of full-fledged implementation, and up to $104 billion in 2022, according to the CBO.

There are pockets of good news for states in the CBO’s forecast. Overall spending on transportation is expected to increase from $85 billion in 2011 to $86 billion in 2012. Federal spending on community and regional development is projected to increase from $15 billion to $18 billion in the next year. Overall non-defense discretionary federal funding is projected d to increase from $566 billion in 2011 to $581 billion in 2012.

Regarding the federal budget deficit, which has dominated the debate in Congress regarding new federal programs and spending, the CBO anticipates a nearly $1.1 trillion deficit in 2012, about 7 percent of the national gross domestic product (GDP). The office notes that, although that would be a decline of 2 percent against the GDP in 2011, it would still be higher than any deficit from 1947 to 2008 by GDP percentage.

The deficit is projected to drop below $600 billion in 2013 and down to $196 billion in 2018, largely because of the expiration of the Bush tax cuts. It is then expected to rise again from 2019 onward, in part because of increased spending on Medicare, Medicaid and Social Security. An extension of the Bush tax cuts, however, which are set to expire at the end of 2012, would add another $233 billion to the deficit in 2014, increasing to $355 billion by 2022, according to the office.

The CBO projections include an outlook on the national economy. The office expects real GDP to grow by 2 percent in 2012 and by 1.1 percent in 2013. Unemployment is projected to actually increase from 8.7 percent in 2011 to 8.9 percent in 2012 and 9.2 percent in 2013 before dropping to 7 percent in 2015 and 5.5 percent in 2017. “Considerable slack remains in the labor market, mainly as a consequence of continued weakness in demand for goods and services,” the CBO states in its report.

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