1. NS3040 Summer Term 2018 Fiscal Forecasts 2018
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. CBO Projections I Main projections (April 9, 2018)
The budget deficit averaging 4.9% of GDP from 2019 to 2028, an increase from its 4.3% forecast in July 2017 for the 2018 to 2027 period.
This would increase the deficit by 230 billion dollars each year on average.
Public debt is expected to increase to 96% of GDP in 2028 from 76% to fund this.
Congress spent 100 billion dollars aiding victims of recent natural disasters.
More likely reoccurrences will pressure the overstretched budget

3. CBO Projections II .
The CBO expects more to be spent on debt payments than defense by 2024
If tax cuts and spending are extended, the gap will widen.
Cutting spending requires fewer Senate votes than raising it; House Republicans are already investigating spending cuts after criticism.
The US budget deficit averaged 2.3% of GDP between 1968 and 2008.
Surpluses were rare, but the deficits were small relative to nominal growth.
'Debt held by the public' rose from 32% of GDP in 1968 to 39% in 2008.

4. CBO Projections III
Stimulus and lower tax revenues widened the budget deficit to 9.8% in 2009
The public debt ratio rose steadily to 76.5% of GDP currently.
The deficit was 3.5% in 2017.
The 'baby-boomer' generation, born and retiring
Will put pressure on the budget as
Mandatory spending on social security and government-provided Medicare insurance will rise.
Social security and Medicare outlays combined rose to 8.6% of GDP in 2017 from around 5.0% in the 1970s.
The CBO expects these to rise to 11.1% of GDP by 2028.

5. Implications I In Japan, public debt is more than 200% of GDP
The government has always been able to borrow in its own currency, enabling it to function effectively.
The United States position would be similar, although perhaps not forever.
Assuming short-term interest rates settle at % by 2020, servicing public debt of more than 100% of GDP will cost around 4% of GDP, approaching the growth of nominal GDP.
To keep debt-to-GDP constant in this scenario, the United States would need to balance the primary budget balance (which excludes interest payments)
Means likely cutting discretionary spending and dampening potential growth.

6. Implications II
Foreign borrowers might be less tolerant of US indebtedness if there was an attractive competitor
The United Kingdom's financial problems in the early 20th century drove financial flows from London to New York.

7. Assessment
In the short run, the tax and spending measures will increase GDP growth, but this will fade over the medium term.
Pressure on the budget from retiring baby boomers will leave the United States with little fiscal room and a higher likelihood of a crisis in coming years.
Foreign borrowers will tolerate higher US indebtedness but perhaps not forever.
Credit ratings agencies could exacerbate this by downgrading their US assessments.

8. CBO Forecasts

9. U.S. Budget Balance/Debt

10. U.S. Budget Spending

11. U.S. Revenues

12. U.S. Real and Potential Output

13. U.S. Spending and Revenue