Deficit in U.S. to Narrow to $468 Billion This Year, CBO Says

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STATE OF THE UNION

The U.S. Capitol dome stands surrounded by scaffolding while under repairs in Washington on Jan. 20, 2015. President Barack Obama was set to focus on the gap between wealthy Americans and middle- and lower-income households Tuesday night when he lays out his plans for what the White House is calling the “fourth quarter” of his presidency.

Photographer: Andrew Harrer/Bloomberg

The U.S. budget deficit will shrink for a fifth straight year in 2016, marking the longest span of improvement since the surpluses of the late 1990s, as falling unemployment helps increase revenue, the Congressional Budget Office said.

The fiscal shortfall this year will decline to $468 billion, or 2.6 percent of gross domestic product, compared with $483 billion in the year ended Sept. 30 and $469 billion forecast in August, the CBO said today in Washington. Next year the gap will be $467 billion, compared with $556 billion seen in August, according to CBO.

The nonpartisan agency said lower oil prices and stronger consumer spending will help drive growth this year, predicting a “slight further increase” in the dollar’s value in foreign-exchange markets. Monetary policy will help underpin the economy for the next few years, it said.

“Over the next year or two, deficits should stay pretty low, and that should be very encouraging,” said Gennadiy Goldberg, U.S. strategist at TD Securities USA LLC in New York. “Revenues are really on their way up.”

In the report, the CBO forecast economic growth of 2.9 percent in the fourth quarter of 2015 compared with the prior year, a slower expansion that the 3.4 percent projected in August. Next year’s growth pace will be the same as this year, the CBO predicted.

Falling Oil

This year’s growth pace will be helped by a decline in oil prices, which will boost real GDP by 0.3 percent at the end of 2015, according to the report. That will help bolster consumer spending, which the CBO projects will advance 3.3 percent in 2015, more than the 2.2 percent gain in the last three months of 2014 compared with a year earlier.

Real disposable income is projected to “grow solidly” in 2015, driven by growth in employee compensation. Purchasing power will also be helped by lower energy prices, CBO said.

The budget shortfall has shrunk from a record-high 9.8 percent of GDP in 2009. The budget was in surplus from 1998 to 2001.

The shortfall, which reached a record $1.4 trillion in 2009, will exceed $1 trillion again starting in about 10 years. It is expected to reach $1.09 trillion, 4 percent of GDP, in 2025, the report said.

That will push publicly held debt to $21.6 trillion, or 78.7 percent of GDP, by 2025 from $13.4 trillion, or 74.2 percent, this year.

Stronger Hiring

The CBO projects the jobless rate will average 5.5 percent this year, lower than the 5.9 percent projected in August. The rate fell to 5.6 percent in December, the lowest since 2008, on the heels of the best year of job growth since 1999.

That strengthening economy has allowed the Federal Reserve to gradually stop its program of bond purchases in 2014, and could enable policy makers to raise the nation’s main interest rate for the first time since 2006. Fed officials meet Jan. 27-28 in Washington.

Chair Janet Yellen indicated in her December press conference that rates are unlikely to be raised “for at least the next couple of meetings.”

The CBO said it expects inflation to stay below the Fed’s 2 percent goal for the next few years. Even so, the agency said that it expects the central bank to “gradually reduce” the extent to which monetary policy is supporting economic growth.

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