CBO: Revised economic forecast roughly counters deficit impact of year-end 2020 COVID relief bill

The nonpartisan Congressional Budget Office (CBO) on February 11 released its annual assessment of the federal budget and economy for the next decade. CBO’s projections – which account for the budget effects of the omnibus tax-and-spending package enacted late last year, and are keyed off of the agency’s most recent economic forecast – are sure to play into the current debate around coronavirus-related economic relief as well as other fiscal policy efforts later this year.

Revenue, spending projections

CBO’s Budget and Economic Outlook: 2021 to 2031 predicts budget deficits will average 4.4 percent of gross domestic product (GDP) over the next decade – ranging from a high of 10.3 percent of GDP in the current fiscal year (fiscal 2021) to a low of 3.7 percent of GDP in fiscal 2026 – roughly one-third higher than the average 3.3 percent of GDP deficit registered over the past 50 years.

According to CBO, the projected current-year deficit of 10.3 percent of GDP – equating to almost $2.3 trillion – would be the second largest deficit since World War II, eclipsed only by the 14.9 percent of GDP shortfall recorded last year.

Revenues and spending: Over the course of the next decade, CBO projects revenues will hover within a relatively narrow band and average 17.5 percent of GDP, roughly in line with the average level over the past five decades. Meanwhile, federal spending is expected to decline as a share of the economy over the near term – from roughly 26 percent of the GDP this year to about 21 percent of GDP in 2025 – as COVID-related fiscal support wanes, but then begin a steady climb later in the decade due to pre-existing demographic trends that are projected to increase the ranks of Social Security and Medicare beneficiaries and thus push up spending within those programs. By 2031, outlays would again top 23 percent of the economy.

Publicly held debt spiked due to 2020 recession, legislative response: Whereas the agency’s comparable (pre-pandemic) report from January 2020 did not envision that the debt held by the public – that is, federal debt not held in intragovernmental accounts such as the Social Security and Medicare trust funds – would cross 100 percent of GDP until the early 2030s, this week’s analysis indicates that dubious milestone was reached by the close of fiscal 2020 on September 30, 2020. Over the course of the next decade, CBO sees the publicly held debt continuing to rise steadily, hitting 107.2 percent of the economy in 2031.

Blunting deficit impact of year-end 2020 COVID relief bill

On a bright note, the agency predicts that positive revisions to its economic forecast will serve to roughly offset the tax cuts and spending increases enacted late last year as part of the Consolidated Appropriations Act, 2021 (For details on that law, see Tax News & Views, Vol. 21, No. 55, Dec. 21, 2020.) In fact, relative to its most recent budget estimates issued in September 2020, cumulative deficits during the overlapping projection years (that is, 2021 through 2030) will actually fall by about $345 billion.

“In 2021, the costs of recently enacted legislation are partly offset by the effects of a stronger economy. In subsequent years, the largest changes stem from revisions to the economic forecast,” the report states. “CBO now projects stronger economic activity, higher inflation, and higher interest rates, boosting both revenues and outlays – the former more than the latter.”

‘Current law’ caveat: Of course, it is important to note that, by law, CBO is generally required to make its projections on the basis of “current law,” or laws as they are currently in effect (one exception is excise taxes dedicated to trust funds – for example, highway taxes – which are assumed to be continued beyond any scheduled expiration).

That means this week’s analysis does not account for the potentially significant budget impact of any potential COVID-related economic relief legislation that is presently being pursued by congressional Democrats and President Biden. (See separate coverage in this issue on the House Ways and Means Committee’s mark-up of tax and pension provisions in President Biden’s American Relief Plan.)

By the same token, also inherent in CBO’s projections is an assumption that all expiring tax provisions – including, most notably, nearly all of the individual tax changes in the 2017 tax code overhaul (P.L. 115-97, known informally as the Tax Cuts and Jobs Act) as well as the passthrough deduction under section 199A which are scheduled to lapse after 2025 – will not be renewed, and revenues will be higher as a result. That assumption similarly applies to scheduled changes affecting bonus depreciation, the interest deduction limitation under section 163(j), the timing of research expenditure deductions, and the minimum tax affecting US multinationals known as the Global Intangible Low-Taxed Income (GILTI) regime that, if left untouched by lawmakers, will have the effect of raising revenue under current law later in the budget window.

Thus, if additional stimulus legislation is enacted into law, or if temporary tax provisions are instead made permanent or otherwise extended beyond their scheduled expiration, future deficits may be higher than this week’s CBO projections.

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