U.S. Budget Deficit to Reach Near-Record $3 Trillion in 2021, CBO Says

(Bloomberg) -- The U.S. will see a $3 trillion budget deficit this year, close to the 2020 record, while the economy will expand notably more than previously forecast, the Congressional Budget Office said as it incorporated the impact of President Joe Biden's Covid-19 relief program.

The deficit is seen narrowing to $1.15 trillion in 2022, the nonpartisan arm of the legislature said in a 10-year economic and budget projections report on Thursday. The deficit for the full 2020 fiscal year was $3.13 trillion, the biggest relative to the size of the economy since World War II.

The totals amount to 13.4% of GDP in 2021 and 4.7% next year, and mark an increase from prior forecasts, as the CBO factored in the Biden administration's $1.9 trillion American Rescue Plan, which was passed in March. The deficit was 14.9% of GDP in 2020.

The agency also sees gross domestic product increasing 7.4% this year, double the prior forecast, published in February, of 3.7%. The CBO sees GDP averaging 1.6% in the five years through 2031, similar to its prior forecast.

“The effects of a stronger economy” and “technical changes” partially offset the deficit effects of recently enacted legislation, CBO analysts said in the report. The agency sees employment surpassing its pre-pandemic level by mid-2022, a more ambitious forecast than other economists though in line with expectations laid out by Treasury Secretary Janet Yellen for a full recovery next year.

Further Analysis

The projections incorporate legislation passed up until May 18, and don't include Biden's recently proposed infrastructure bill or his other longer-term economic proposals.

The CBO's updated outlook underscores the challenge facing Biden as he seeks to pass plans worth trillions of dollars. Republican lawmakers have for months criticized the administration for deficit spending, while rejecting the White House's proposals for tax increases on corporations and the wealthy to help address fiscal concerns.

As for inflation, the CBO sees the consumer price index jumping 3.4% in 2021, before remaining just above 2% for the next decade. The Federal Reserve has recently signaled that inflationary pressures are stronger than first expected, as the U.S. economy reopens and robust demand as well as bottlenecks in the supply of goods and services push prices up. Fed policy makers have kept to their view that the upswing will prove “transitory.”

The CBO said it will release a more detailed 10-year outlook on July 21 and further documents outlining the effects of Biden's economic plans in the month.