The Congressional Budget Office (CBO) projects the 2016 ”baseline” federal budget deficit will be $544 billion, $105 billion higher than in 2015 ($439 billion). If this 2016 deficit projection is achieved, it would mark the first increase in the deficit since 2009.
The deficit projection is somewhat misleading, however, as $43 billion of the deficit results from a timing quirk. Because October 1, 2017, the first day of FY2017, falls on a Sunday, some government payments normally to be made in FY2017 are expected to happen in FY2016, thus increasing the FY2016 deficit while lowering the 2017 deficit.
The projected $105 billion increase in the 2016 deficit results as a four percent increase in estimated revenue (+$127 billion), which is more than offset by a projected six percent (+$232 billion) rise in outlays.
Higher revenue projections come from continuing growth in the economy leading to rising incomes. Revenues from individual income tax payments (up $80 billion or five percent) will rise as incomes increase. However, corporate income tax revenue is expected to decline by five percent (-$17 billion) because the FY2016 Consolidated Appropriations Act extended expired tax provisions and made the extension retroactive to the beginning of 2015. Other revenues (including payroll taxes) are projected to increase by $64 billion.
CBO projections show that total federal outlays should be $3.919 trillion, up $$232 billion from the pervious year ($3.687 trillion).Total mandatory spending in 2016 ($2.466 trillion) is up $167 billion, accounting for more than 70 percent of the total spending increase. Social Security outlays will rise $28 billion (Social Security recipients will receive no cost of living increase in 2916), while total net outlays for Medicare, Medicaid, the Children;s Health Insurance Program, and health insurance premium subsidies are expected to increase by $104 billion.
CBO expects total discretionary outlays will be $1.198 trillion in 2016, up $32 billion, as the Bipartisan Budget Act raised statutory limits on both defense and nondefense discretionary spending.
Net interest payments will rise by $32 billion in FY2016, according to CBO. The rise is attributed to the continuing increase in the national debt and projected rising interest rates.
The CBO report also includes deficit estimates for 2016 through 2026. These estimates show baseline deficits increasing slightly through 2018 to $572 billion and then increasing at a faster annual pace reaching $1.366 trillion in 2026. assuming no changes to current law.
Underlying CBO’s baseline deficit projections are economic assumptions that expect the economy to grow by about 2.5 percent in real terms for the next few years, but then fall back to an annual average real growth of 2 percent from 2018 through 2026. The slower growth in the outyears results from slowing in the supply of labor.
CBO expects the annual unemployment rate to drop to 4.5 percent in 2016 and hold that rate for a few years. However, the rate is then expected to rise to an average of 5 percent through 2026. CBO projects the rate of inflation (as measured by the change in the Consumer Price Index–CPI) to stay below 2 percent until 2017 when it will rise to 2.4 percent. The CPI is expected to average that level through 2026.