CBO's Revised Budget Sees 2011 Deficit Rising By $500 Billion To $1.5 Trillion; $4 Trillion In Deficit Through 2013 Guarantees QE3+

Tyler Durden's picture

No surprise: the projected deficit just went up by another half a trillion: "For 2011, the Congressional Budget Office (CBO) projects that if current
laws remain unchanged, the federal budget will show a deficit of close
to $1.5 trillion, or 9.8 percent of GDP." This is up from $1.07 trillion: a very small margin of error there. But don't worry - like true Keynesians the CBO expects that future deficits will have no choice but to go down: "The deficits in CBO's baseline projections drop markedly over the next
few years as a share of output and average 3.1 percent of GDP from 2014
to 2021. Those projections, however, are based on the assumption that
tax and spending policies unfold as specified in current law.
Consequently, they understate the budget deficits that would occur if
many policies currently in place were continued, rather than allowed to
expire as scheduled under current law." So between 2010's $1.3 trillion, 2011 $1.5 trillion, and 2012's revised $1.1 trillion, we have $3.9 trillion just in deficit costs to plug. And as Zero Hedge has repeatedly demonstrated the actual debt to be issued is usually about 33% higher than the deficit funding need, meaning that over the next 3 years the US will need to issue about $5 trillion in debt. Which means further debt monetization is guaranteed as foreign investors have now fully withdrawn and the Fed is all alone in gobbling up every dollar in gross issuance. QE3 is guaranteed and we are stunned that the market continues not to realize this.

From the release:

The United States faces daunting economic and budgetary
challenges. The economy has struggled to recover from the recent
recession, which was triggered by a large decline in house prices and a
financial crisis—events unlike anything this country has seen since the
Great Depression. During the recovery, the pace of growth in the
nation's output has been anemic compared with that during most other
recoveries since World War II, and the unemployment rate has remained
quite high.

For the federal government, the sharply lower revenues and
elevated spending deriving from the financial turmoil and severe drop in
economic activity—combined with the costs of various policies
implemented in response to those conditions and an imbalance between
revenues and spending that predated the recession—have caused budget
deficits to surge in the past two years. The deficits of $1.4 trillion
in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross
domestic product (GDP), the largest since 1945—representing
10.0 percent and 8.9 percent of the nation's output, respectively.

For 2011, the Congressional Budget Office (CBO) projects that
if current laws remain unchanged, the federal budget will show a deficit
of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO's
baseline projections drop markedly over the next few years as a share
of output and average 3.1 percent of GDP from 2014 to 2021. Those
projections, however, are based on the assumption that tax and spending
policies unfold as specified in current law. Consequently, they
understate the budget deficits that would occur if many policies
currently in place were continued, rather than allowed to expire as
scheduled under current law.

The Economic Outlook

Although recent actions by U.S. policymakers should help
support further gains in real (inflation-adjusted) GDP in 2011,
production and employment are likely to stay well below the economy's
potential for a number of years. CBO expects that economic growth will
remain moderate this year and next. As measured by the change from the
fourth quarter of the previous year, real GDP is projected to increase
by 3.1 percent this year and by 2.8 percent next year. That forecast
reflects CBO's expectation of continued strong growth in business
investment, improvements in both residential investment and net exports,
and modest increases in consumer spending. It also includes the impact
of the Tax Relief, Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 (referred to in this report as the 2010 tax act),
enacted in December, which provides a short-term boost to the economy by
reducing some taxes, extending unemployment benefits, and delaying an
increase in taxes that would otherwise have occurred in 2011. CBO
projects that inflation will remain very low in 2011 and 2012,
reflecting the large amount of unused resources in the economy, and will
average no more than 2.0 percent a year between 2013 and 2016.

The recovery in employment has been slowed not only by the
moderate growth in output in the past year and a half but also by
structural changes in the labor market, such as a mismatch between the
requirements of available jobs and the skills of job seekers, that have
hindered the reemployment of workers who have lost their job. Payroll
employment, which declined by 7.3 million during the recent recession,
gained a mere 70,000 jobs (or 0.06 percent), on net, between June 2009
and December 2010. (By contrast, in the first 18 months of past
recoveries, employment rose by an average of 4.4 percent.) Consequently,
the rate of unemployment has fallen by only a small amount: After
climbing to 10.1 percent of the labor force during 2009, the
unemployment rate declined only to 9.4 percent by December 2010. Other
measures of labor market conditions suggest even more slack than does
the unemployment rate. For example, almost 9 million workers who have
wanted full-time work in the past two years have been employed only part

As the recovery continues, the economy will add roughly 2.5
million jobs per year over the 2011–2016 period, CBO estimates. However,
even with significant increases in the number of jobs, a substantial
reduction in the unemployment rate will take some time. CBO projects
that the unemployment rate will gradually fall in the near term, to 9.2
percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter
of 2012, and 7.4 percent at the end of 2013. Only by 2016, in CBO's
forecast, does it reach 5.3 percent, close to the agency's estimate of
the natural rate of unemployment (the rate of unemployment arising from
all sources except fluctuations in aggregate demand, which CBO now
estimates to be 5.2 percent).

For the period beyond 2016, CBO's economic projections are
based on trends in the factors that underlie potential output, including
the labor force, capital accumulation, and productivity. The
projections therefore do not explicitly incorporate fluctuations
resulting from the business cycle. In CBO's projections, growth of real
GDP averages 2.4 percent annually from 2017 to 2021, a pace that matches
the growth of potential GDP over those years. The unemployment rate
averages 5.2 percent in that same period.

The Budget Outlook

The recovery now under way might be expected to lessen the
budget imbalance in 2011 by increasing tax revenues and decreasing
spending for certain income-support programs, such as unemployment
compensation. However, revenue growth will be restrained by the slow and
tentative pace of the recovery and by the 2010 tax act.

Moreover, outlays for many programs are projected to continue
to grow and more than offset the decreases in spending (for unemployment
compensation, for example) yielded by improving economic conditions.

The resulting federal budget deficit of nearly $1.5 trillion
projected for this year will equal 9.8 percent of GDP, a share that is
nearly 1 percentage point higher than the shortfall recorded last year
and almost equal to the deficit posted in 2009, which at 10.0 percent of
GDP was the highest in nearly 65 years.

By CBO's estimates, federal revenues in 2011 will be $123
billion (or 6 percent) more than the total revenues recorded two years
ago, in 2009. The continued slow improvement in economic conditions is
anticipated to boost revenues from individual income taxes, corporate
taxes, and other sources by nearly $200 billion between those two years;
however, revenues from social insurance taxes are projected to decline
by more than $70 billion relative to their level two years ago, mostly
as a result of a one-year reduction in payroll taxes included in the
2010 tax act.

Spending, for the most part, has been growing faster than
revenues. Programs related to the federal government's response to the
problems in the housing and financial markets are an exception; outlays
recorded for the Troubled Asset Relief Program (TARP), for example, will
decrease by $176 billion from 2009 to 2011, CBO projects. But if
current laws remain unchanged, federal outlays other than those for the
TARP are projected to be $366 billion (or 11 percent) higher in 2011
than they were in 2009.

According to CBO's projections, mandatory spending excluding
outlays for the TARP will increase by $191 billion (or 10 percent)
between 2009 and 2011. Significant growth in many areas—in particular,
for Social Security, Medicare, and Medicaid—is expected to be offset
only partially by reductions in outlays for other programs, primarily
for Fannie Mae, Freddie Mac, and deposit insurance. Discretionary
spending will increase by an estimated $137 billion over the two-year
period; about one-third of that increase stems from funding provided by
the American Recovery and Reinvestment Act of 2009 (ARRA). In addition,
outlays for net interest will rise by an estimated $38 billion from 2009
to 2011, mostly because of substantial increases in borrowing.

Under current law, CBO projects, budget deficits will drop
markedly over the next few years—to $1.1 trillion in 2012, $704 billion
in 2013, and $533 billion in 2014. Relative to the size of the economy,
those deficits represent 7.0 percent of GDP in 2012, 4.3 percent in
2013, and 3.1 percent in 2014. From 2015 through 2021, the deficits in
the baseline projections range from 2.9 percent to 3.4 percent of GDP.

The deficits that will accumulate under current law will push
federal debt held by the public to significantly higher levels. Just two
years ago, debt held by the public was less than $6 trillion, or about
40 percent of GDP; at the end of fiscal year 2010, such debt was roughly
$9 trillion, or 62 percent of GDP, and by the end of 2021, it is
projected to climb to $18 trillion, or 77 percent of GDP. With such a
large increase in debt, plus an expected increase in interest rates as
the economic recovery strengthens, interest payments on the debt are
poised to skyrocket over the next decade. CBO projects that the
government's annual spending on net interest will more than double
between 2011 and 2021 as a share of GDP, increasing from 1.5 percent to
3.3 percent.

CBO's baseline projections are not intended to be a forecast of
future budgetary outcomes; rather, they serve as a neutral benchmark
that legislators and others can use to assess the potential effects of
policy decisions. Consequently, they incorporate the assumption that
current laws governing taxes and spending will remain unchanged. In
particular, the baseline projections in this report are based on the
following assumptions:

  • Sharp reductions in Medicare's payment rates for physicians' services take effect as scheduled at the end of 2011;
  • Extensions of unemployment compensation, the one-year
    reduction in the payroll tax, and the two-year extension of provisions
    designed to limit the reach of the alternative minimum tax all expire as
    scheduled at the end of 2011;
  • Other provisions of the 2010 tax act, including extensions of
    lower tax rates and expanded credits and deductions originally enacted
    in the Economic Growth and Tax Relief Reconciliation Act of 2001, the
    Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire
    as scheduled at the end of 2012; and
  • Funding for discretionary spending increases with inflation
    rather than at the considerably faster pace seen over the dozen years
    leading up to the recent recession.

The projected deficits over the latter part of the coming
decade are much smaller relative to GDP than is the current deficit,
mostly because, under those assumptions and with a continuing economic
expansion, revenues as a share of GDP are projected to rise
steadily—from about 15 percent of GDP in 2011 to 21 percent by 2021.

As a result, the baseline projections understate the budget deficits
that would arise if many policies currently in place were extended,
rather than allowed to expire as scheduled under current law. For
example, if most of the provisions in the 2010 tax act that were
originally enacted in 2001, 2003, and 2009 or that modified estate and
gift taxation were extended (rather than allowed to expire on December
31, 2012), and the alternative minimum tax was indexed for inflation,
annual revenues would average about 18 percent of GDP through 2021
(which is equal to their 40-year average), rather than the 19.9 percent
shown in CBO's baseline projections. If Medicare's payment rates for
physicians' services were held constant as well, then deficits from 2012
through 2021 would average about 6 percent of GDP, compared with 3.6
percent in the baseline. By 2021, the budget deficit would be about
double the baseline projection, and with cumulative deficits totaling
nearly $12 trillion over the 2012–2021 period, debt held by the public
would reach 97 percent of GDP, the highest level since 1946.

Beyond the 10-year projection period, further increases in
federal debt relative to the nation's output almost certainly lie ahead
if current policies remain in place. The aging of the population and
rising costs for health care will push federal spending as a percentage
of GDP well above that in recent decades. Specifically, spending on the
government's major mandatory health care programs—Medicare, Medicaid,
the Children's Health Insurance Program, and health insurance subsidies
to be provided through insurance exchanges—along with Social Security
will increase from roughly 10 percent of GDP in 2011 to about 16 percent
over the next 25 years. If revenues stay close to their average share
of GDP for the past 40 years, that rise in spending will lead to rapidly
growing budget deficits and surging federal debt. To prevent debt from
becoming unsupportable, policymakers will have to substantially restrain
the growth of spending, raise revenues significantly above their
historical share of GDP, or pursue some combination of those two

Full report summary (pdf)

And entire soon to be re-re-re-revised document (pdf)