The new deficit estimates could deepen worries that U.S. policymakers face a shortage of tools to bolster the economy should the country fall into recession, some economists say. In addition to potentially less room to spend or pass tax cuts, the Federal Reserve cannot reduce interest rates, which are quite low, as much as it has during previous downturns.
The country is not in a recession, but recent economic data has made clear the economy is growing more slowly as business investment declines, the manufacturing industry struggles and stock and bond markets react to uncertainty over trade policy, which the CBO cited Wednesday as a drag on U.S. growth.
“Deficits are now expected to be larger than previously projected,” the CBO report states. “To put [debt] on a sustainable course, lawmakers will have to make significant changes to tax and spending policies.”
Right now, U.S. debt levels have remained manageable in part because the interest rates on U.S. Treasury bonds have been low. And the global economic slowdown has in fact pushed them lower, as investors seek out government debt as a place to park cash.
But the debt still remains a long-term threat, some analysts say, one factor that some lawmakers may weigh as they decide how far to go to stimulate the economy in a downturn.
“We all know we are already on a troubling fiscal path, but today’s CBO report shows us that our leaders are making things considerably worse,” said Michael A. Peterson, chief executive of the Peter G. Peterson Foundation, which advocates for lower deficits.
On Wednesday, President Trump backed away from one idea to boost growth: a cut in payroll taxes, which fund Social Security. A payroll tax cut has been adopted in past years to stimulate the economy, and the White House had looked at whether to advance the proposal in response to signs the economy was worsening. The idea can be attractive because it provides an immediate pay boost to workers.
But after confirming he was looking at the idea Tuesday, Trump said on Wednesday that he’s not considering it any longer.
“We don’t need it. We have a strong economy,” he said.
Even as he declared the economy didn’t need support from Congress, however, he insisted that it needed help from the Fed. In a tweet, Trump once again pressed for the Fed to cut interest rates sharply. The Fed usually cuts rates in times of economic stress.
“The only problem we have is Jay Powell and the Fed. He’s like a golfer who can’t putt, has no touch,” Trump tweeted Wednesday. “Big U.S. growth if he does the right thing, BIG CUT — but don’t count on him! So far he has called it wrong, and only let us down.”
The Fed cut its benchmark interest rate last month, out of concern the economy is slowing, and it is weighing further cuts this year. But the Fed is targeting a historically low 2 to 2.25 percent interest rate, and the central bank can’t cut rates as much as it has in the past.
During the past seven recessions, the Fed has cut interest rates by at least 5 percentage points, according to Jay Shambaugh, senior fellow in economic studies at the Brookings Institution. Fed Chair Jerome H. Powell may give a better sense of the central bank’s plans during a speech Friday in Jackson Hole, Wyo.
The Federal Reserve honed some other monetary policy tools during its response to the Great Recession — such as quantitative easing, or buying bonds to pump money into the financial system — that could prove useful to deploy in the next recession. Still, it’s not clear how effective those would be now — the Fed still holds trillions of dollars of bonds it bought following the 2008 financial crisis and Great Recession.
“We tested these out in a way we hadn’t before,” said Ernie Tedeschi, who served as an economist in the Obama administration’s Treasury Department. “The Fed may have tools in its toolkit, but those tools might be less effective.”
Some analysts note that between the deficit soaring and low interest rates, neither Congress nor the Fed would be able to do that much in a recession.
“Both sides are out of bullets,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “I’ve never seen a situation where there’s a recession cloud on the horizon but Washington is totally unprepared to deal with a downturn in the economy.”
Others argue, however, that it would be a mistake to confuse the long-term deficit challenges with the need to keep the economy healthy in the long-run. In the years following the 2008 financial crisis and Great Recession, Republicans pushed for sharp spending cuts to correct the deficit, moves that many economists say slowed the recovery.
“That couldn’t be more wrong,” Jared Bernstein, a former Obama administration economist, said of the idea that deficits should stop lawmakers from acting in the event of a downturn. “Of the many things that keep me up in night, that’s in the top 5.”
In its report, the CBO said the United States has added about $1.9 trillion in new spending over the next decade, as a result of a bipartisan budget deal as well as emergency spending package aimed at the crisis at the U.S.-Mexico border. Those budget increases will be partially offset by lower spending than projected because of reductions in interest rates paid on the U.S. debt.
By the end of next decade, the United States’ debt will approximately equal the entire nation’s economy or GDP.
It may be difficult for Democrats and Republicans to agree on how to stimulate the economy so soon after the GOP passed an enormous tax cut.
At the outset of the last recession, House Speaker Nancy Pelosi (D-Calif.) and former Senate majority leader Harry M. Reid (D-Nev.) worked closely with the George W. Bush administration to push an aggressive tax cut aimed at stimulating the economy.
But it is much harder to imagine current Democratic leadership forging a successful compromise with the Trump administration, said former congressman Barney Frank (D-Mass.), who worked with Pelosi at the time.
“The classic ways to respond — reducing interest rates and pumping spending — are constraints. An even bigger constraint is the weirdness of Donald Trump,” Frank said. “There won’t be anything for [Democrats] to work with now.”