WASHINGTON — The White House’s annual update to its most recent budget forecasts shows a brighter near-term picture for federal finances but a gloomier outlook for inflation and economic growth.
Compared with late March when the Biden administration released its fiscal 2023 budget request, the Office of Management and Budget in a report issued Tuesday sees the deficit for the current fiscal year dropping to just over $1 trillion, a $383 billion improvement from its prior forecast.
It’s also $1.7 trillion lower than the previous fiscal year’s budget shortfall, a drop that OMB Director Shalanda Young touted in a blog post as the “single largest nominal decline in the federal deficit in American history.”
While that improvement was driven by better-than-expected tax collections, economic growth is clearly slowing amid higher inflation and interest rates than the White House budget office previously expected.
Growth in inflation-adjusted gross domestic product is now predicted to cool down to 1.4% this year and 1.8% in 2023 from the loftier 3.8% and 2.5%, respectively, that the White House said it expected in March.
And inflation as measured by the consumer price index — once thought to be “transitory” by many experts, including in the administration — is seen at 6.6% in the fourth quarter of 2022 compared to a year earlier, compared with 2.9% in the March budget. That’s well above the Congressional Budget Office’s most recent estimate of 4.7%, but in line with private sector forecasts.
The “mid-session” review from the White House budget office is due every year by mid-July, but the deadline is often missed as administration officials need to tabulate more recent developments. And this year the original budget release was delayed to late March, well after the nonbinding early February deadline in statute.
The OMB updated forecast doesn’t factor in the latest legislative actions, including enactment of the fiscal 2022 budget reconciliation law, which is expected to reduce deficits by nearly $300 billion over a decade; a new $278 billion veterans health care and disability expansion program for those exposed to toxic substances; and the $79 billion “chips-plus” law providing grants and tax credits for domestic semiconductor manufacturing development.
It also doesn’t take into account the most recent economic data, using only data available in early June; as a result the three most recent consumer price index readings aren’t factored in, or the advance second quarter GDP estimate, which shows a 0.9% contraction in economic activity.
While the near-term budget picture appears improved from several months ago, over the next decade the picture worsens somewhat.
Between fiscal years 2023 and 2032, cumulative deficits are projected to be $1.2 trillion larger than the White House predicted in March, after taking into account legislation enacted earlier this year and economic and technical revisions.
While revenue collections are expected to be almost $2.1 trillion greater due to higher wages and salaries — partly due to higher inflation — as well as technical reasons, spending is forecast to increase by substantially more. Major contributors to increased spending include the fiscal 2022 omnibus spending law, as well as Social Security payments to reflect higher inflation and more spending to service federal debt as interest rates have moved higher.
That’s before the effect of additional legislative proposals the Biden administration has sought from Congress, without success so far. If lawmakers enacted the entirety of Biden’s budget proposals, the OMB said, deficits would be nearly $2.6 trillion smaller over a decade, largely due to additional tax increases on high-income households and corporations.