CBO: Deficit rising, but no recession [Updated]

On January 23, 2008, in General, by Neil Stevens

CBO is projecting a growing deficit and a slowing economy, however they project no recession at this time.

What’s interesting is that the projected $219 billion deficit (up from $163 billion last year) does not include the ‘stimulus’ bill the Democrats would like to pass. So we can expect the Democrats to be increasing the deficit by 50% with their coming spending.

Quoting today’s CBO report:

The state of the economy is particularly uncertain at the moment. 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. Economic performance worse than that suggested in CBO’s forecast could significantly decrease projected revenues and increase projected spending. Furthermore, policy changes intended to mitigate the economic slowdown would, by design, tend to increase the budget deficit in the short term.

CBO expects the economy to rebound after 2008, as the negative effects of the turmoil in the housing and financial markets fade. Under the assumptions that govern CBO’s baseline, the budget deficit will amount to 1.5 percent of GDP or less each year from 2009 to 2011. Subsequently, the budget will show a small surplus of 0.5 percent of GDP in 2012 and remain near that level each year through 2018 (the end of the current 10-year projection period).

I find it also helpful that CBO is standing up today and saying there’s no recession. I have no idea actually if CBO projections tend to be accurate or not, but I hope the markets can be fed every bit of good news they can get.

Of course, Social Security, Medicare, and Medicaid are still projected to grow faster than GDP over the next 10 years. But that’s not news, so nothing will be done.

Update: And the markets finished strongly today, with the Dow Jones Industrials up 298.98 on the day.


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