WASHINGTON—Congress’s nonpartisan scorekeeper is predicting wider budget deficits and a temporary period of stronger economic growth following recent legislation to cut taxes and boost government spending.
The Congressional Budget Office on Monday said the federal budget deficit would total $804 billion this year, 43% higher than it had projected last summer, and exceed $1 trillion a year starting in 2020. The deficit in fiscal 2017 was $665 billion.
Economic growth will jump above 3% this year thanks to fiscal stimulus, the CBO said, but the agency predicted the acceleration will prove largely fleeting. It raised its estimates for the economy’s long-term growth trend modestly.
Larger deficits will add to the national debt. Debt held by the public will hit $28.671 trillion at the end of fiscal 2028, or 96.2% of gross domestic product, up from 78% of GDP in 2018, the CBO estimated.
The CBO projected that annual deficits, measured as a share of total economic output, would ease somewhat after peaking at 5.4% of GDP in fiscal 2022.
Those deficit estimates assume current law won’t be changed further, meaning Congress would allow some tax cuts to expire and spending caps to take effect again. If current policies largely remain in place, the CBO predicted higher deficits and a national debt around 105% of GDP by the end of 2028. That level has been exceeded only once in U.S. history, in the immediate aftermath of World War II.
“Moreover, the pressures contributing to that rise would accelerate and push debt up even more sharply in subsequent decades,” the agency said.
Hoping to rein in federal spending, top White House officials are working on a proposal of “rescissions,” or cuts they hope to make to last month’s $1.3 trillion spending bill. Mr. Trump can submit his proposal to Capitol Hill, where legislation canceling those funds would be considered through an expedited process, although Congress isn’t required to respond.
It isn’t yet clear if a rescission bill could pass the Senate, even though it would need just a simple majority, instead of the 60 votes most bills need to clear procedural hurdles. The $1.3 trillion spending law increased both military and domestic funding and was the product of bipartisan negotiations among the top four congressional leaders.
The CBO’s annual report on the outlook for the federal budget and the U.S. economy typically comes out in January, but it was delayed this year so analysts could account for the effects of several recent changes to fiscal policy.
Congress in December enacted a package of corporate and individual tax cuts and in February approved a two-year budget deal, followed last month by a spending bill that boosted government outlays this year on both domestic and military programs.
Monday’s report offered early independent estimates for how those measures will affect federal-government finances and the broader economy in years to come. The nonpartisan CBO is led by economist Keith Hall, who was appointed in 2015 by congressional Republican leaders.
Supporters of the tax legislation, including President Donald Trump, said it would spur stronger economic growth. Democrats opposed the bill, saying it wouldn’t do enough to help the middle class and the broader economy.
Wall Street forecasters and other economists predicted the tax-law changes likely would increase growth in the short term but were split over whether it would have meaningful long-term effects. The nonpartisan Joint Committee on Taxation staff in December estimated the tax cuts would boost the economy, but not enough to make up for the bulk of lost revenue.
When the CBO issued projections in June, it expected the federal budget deficit would widen from 2.8% of gross domestic product in the 2018 fiscal year to 5.2% of GDP in 2027. That would take the debt held by the public from 78% of GDP in the current fiscal year to 91.2% of GDP in 2027.
In Monday’s report, taking account of bills that both cut taxes and increased spending, the CBO revised deficit numbers higher in the short term. The deficit is expected to rise from 4% of GDP in 2018 to 5.4% of GDP in 2022, then ease to 5.1% of GDP in 2028. The debt held by the public will climb from 78% of GDP in 2018 to 94.5% of GDP in 2027 and 96.2% in 2028, the agency said.
Federal-government revenues are expected to total 17.5% of GDP in 2019-2028, down from last summer’s estimate of 18.2% of GDP in 2018-2027. Outlays are expected to be 22.4% of GDP in 2019-2028, unchanged from last summer’s estimate for 2018-2027.
It is unusual for the federal budget deficit to significantly expand outside of wars or recessions. But even before the recent flurry of fiscal stimulus, the CBO expected deficits would widen over the coming years as revenues failed to keep up with outlays including spending on major social programs such as Social Security and Medicare.
Fitch Ratings last week reaffirmed its top rating for U.S. government debt, despite what it described as deterioration in the outlook for public finances.
“While there has been a recent loosening in fiscal policy, Fitch considers debt tolerance to be higher than that of other (nations),” the ratings agency said. “However, rising deficits and debt could eventually test these credit strengths, in the absence of reform.”
The economy is set to get a boost in the short term from increased government spending and lower taxes.
The CBO predicted GDP would expand 3.3% in the fourth quarter of 2018 from a year earlier, up from its June 2017 estimate of 2.0% growth. Annual growth would slow in subsequent years: 2.4% in 2019, 1.8% in 2020, 1.5% in 2021 and 2022, and 1.7% in 2023 through 2028.
Underlying trends are expected to keep growth modest compared with past expansions and well below the Trump administration’s goal of sustained growth at or above 3%.
The CBO estimated potential GDP growth in 2018 through 2028 would average 1.9% a year, based on expected growth in the labor force and worker productivity. That was up slightly from its estimate last summer of 1.8% annual growth in the 2017-2027 period. Potential GDP growth is the maximum growth rate consistent with stable inflation.
That’s largely in line with recent predictions by Federal Reserve officials. The median projection by Fed policy makers in March saw long-run GDP growth at 1.8% a year, with individual estimates ranging from 1.7% to 2.2%.
Such estimates, to be sure, come with substantial uncertainty.
Elements of the new tax law should “encourage investment, which should help productivity, encourage labor-force participation,” Federal Reserve Chairman Jerome Powell told reporters last month. “We don’t know how big those effects are going to be. We don’t know what the timing would be.”
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com
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