CBO Projects $219B Deficit, No Recession in 2008

The U.S. economy will post a $219 billion deficit in 2008, but will not fall into recession, the Congressional Budget Office predicted in projections released yesterday.

The $219 billion deficit would be the first increase in the annual shortfall in four years, and the CBO blames the slowing economy. The agency warned additional military spending or an economic stimulus plan could raise the number.

“The state of the economy is particularly uncertain at the moment,” the report said. “The pace of economic growth slowed in 2007, and there are strong indications that it will slacken further in 2008. In CBO’s view, the ongoing problems in the housing and financial markets and the high price of oil will curb spending by households and businesses this year and trim the growth of GDP. Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession.”

CBO said the economy should “rebound after 2008, as the negative effects of the turmoil in the housing and financial markets fade,” with the deficit falling to $198 billion next year and showing a surplus in 2012.

It also projected GDP will rise 1.7% this year and 2.8% next year.

But the agency warned: “The relatively sanguine outlook suggested by the 10-year baseline projections should not be interpreted as implying that the nation’s underlying fiscal condition is sound, both because the United States continues to face severe long-term budgetary challenges and because many observers expect policy changes that would deviate from the current-law baseline over the next decade.”

Among these challenges, CBO cited health care cost increases, and an aging population, which will pressure the budget in coming decades.

“Economic growth alone will be insufficient to alleviate that pressure, as Medicare and Medicaid and, to a lesser extent, Social Security require ever greater resources under current law,” the report said. “A substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of the two will be necessary to maintain the nation’s long-term fiscal stability.”

CBO added: “Much of the projected increase in revenues results from the growing impact of the alternative minimum tax (AMT) and, even more significantly, the expiration at the end of 2010 of various provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).”

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