In an update to its 10-year economic outlook, The Congressional Budget Office (CBO) projects that real GDP will grow by 3.1 percent this year, 2.4 percent next year and considerably less in subsequent years.
Although CBO says this update does not differ significantly from its economic forecast last spring, the latest report provides a useful reminder that the growth spurt in the second quarter of this year should not be considered a harbinger of much higher economic growth than the country has experienced in the recent past.
President Trump and many members of Congress have suggested that such unusually high growth could be sustained on a permanent basis, enabling the government to ignore concerns about the rising federal debt.
The 3.1 percent growth projection for this year is down from the CBO’s 3.3 percent projection in April. CBO attributed this in part to updated estimates of federal purchasing.
CBO Director Keith Hall said that for the second half of the year, the budget office “expects real GDP to grow at roughly the same average pace at which it grew in the first half of the year — that is, more slowly than during the second quarter alone, when it grew at a rate that would equal 4.1 percent applied to the entire year.”
He cited several factors that boosted second-quarter growth but are expected “to either fade or reverse.” These factors included “a rebound in the growth of consumer spending after a weak first quarter and a surge in agricultural exports.”
Next year, CBO projects, the pace of GDP growth will drop as the growth in business investment and government purchases slows. From 2020 to 2022, real GDP growth would average only 1.6 percent a year. After that, GDP would grow by about 1.7 percent a year through 2028.
Those should be sobering projections for elected officials and political candidates who believe that the country can simply grow its way out of its fiscal problems.
The CBO report notes that its economic projections “do not differ significantly from those of other forecasters.” Administration officials, however, maintain that the economy can grow at 3 percent or — with additional stimulus measures — even 4 percent in the years ahead.
The budget office expects that excess demand will put upward pressure on prices, wages and interest rates over the next few years. As CBO and many others have noted, rising interest rates — plus additional federal borrowing — could cause interest payments to claim more and more of the federal budget over the coming decade.
Hall also cautions that U.S. trade policy has already changed in recent weeks and that “the effects of new tariffs may become more substantial and have a larger effect on the economy than CBO accounted for in its current projections.”
Although President Trump recently claimed that tariffs would bring wealth into the country, economists across the political spectrum have warned that trade wars have the potential to do great harm to the U.S. economy.
Economic growth can help put the federal government on a more sustainable fiscal track. But as the CBO’s projections indicate, growth alone will not be sufficient. To rein in the debt, Washington must still make difficult fiscal policy choices and pursue broad budget-related reforms.