THE nonpartisan Congressional Budget Office (CBO) hiked its estimate for the US budget deficit by US$130 billion for this year, now seeing the shortfall at US$1.54 trillion, and renewed its warning that the Treasury could run out of sufficient cash as soon as early next month.

The new numbers from the CBO show an even worse fiscal outlook than the agency presented in February, and may be seized on by Republican negotiators attempting to use the current debt-limit showdown with Democrats to slash federal spending.

The CBO also on Friday (May 12) reiterated that it sees a “significant risk” of a US payments default in the first two weeks of June unless lawmakers raise the federal debt ceiling. If the Treasury can stave off default until Jun 15, infusions of revenue could help carry the US at least to the end of July, the CBO said.

President Joe Biden and House Speaker Kevin McCarthy are locked in a tense political fight over raising the US$31.4 trillion debt limit, with Democrats demanding a “clean” increase or suspension, as Congress did for previous administrations.

The US$130 billion increase in the deficit seen by the CBO for the 2023 fiscal year roughly matches the size of the cuts in discretionary spending next year that McCarthy is seeking in the debt-limit talks. McCarthy is also seeking other cuts outside the discretionary budget.

The 9 per cent increase in the deficit estimate for the year through September is due to changes in the CBO’s model, including:

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• Factoring in US$71 billion in higher spending related to relaxed student-loan repayment programmes.

• Some US$33 billion in increased spending on deposit insurance accounts.

• US$23 billion more in interest costs due to rising interest rates.

The spending increases were mitigated somewhat by US$223 billion in reduced spending for Medicare Advantage over the decade due to reimbursement rules changes.

Over the coming decade, deficits total US$20 trillion and federal debt held by the public reaches US$46.7 trillion in 2033 – amounting to 119 per cent of gross domestic product, the highest in recorded US history.

The agency also projects that annual deficits will reach US$2.7 trillion in 2033, or 6.9 per cent of GDP. That compares with a 50-year average of 3.6 per cent. BLOOMBERG