The Congrssional Budget Office (CBO) has just released its biannual budget and economic forecast. The full report, including the controversial and much misunderstood appendix Labor Market Effects of the Affordable Care Act, runs 182 pages. Mercifully, the CBO provides a 5 page Budget and Economic Outlook Summary.
The CBO projects the federal deficit to be 3.0% of GDP in FY 2014 and then to decline slightly before beginning to rise in 2018. The deficit is projected to average 3.0% of GDP through 2019 and 3.5% through 2024 compared to an 3.1% average over the last 40 years. As a result Debt Held by the Public as a percentage of GDP will decline slightly from 73.6% in 2014 for three years before slowly rising to 79.2% at 2024. The CBO expects benign inflation (PCE headline and core) of 2% or less through 2024. However, it also expects that real GDP growth will not exceed 3.4% over the next three years and then average not much better than 2.2% through 2024. As a result, CBO forecasts a rise in the 10 year treasury from 3.1% at year-end to 4.8% at year-end 2017. The ten year treasury is forecast to average 5% during 2018-2024 which does not make sense given its GDP and inflation projections. Finally, and most worrisome, the CBO expects GDP growth to fall short of potential throughout the the next ten years.