Week 10, 2013: US Deficit Forecasts

Summary: The big economic news from the past week comes from the United States, where automatic spending reductions came into effect after politicians failed to come up with a deficit reduction plan they could all agree on.

What does the chart show? The chart shows forecasts for the US Government deficit (the difference between spending and revenue) in billions of dollars.  The blue line shows the original forecasts before the automatic spending reductions had been triggered, and the red line shows the forecast afterwards. The y-axis has been flipped, so that when the lines go up it signifies the deficit increasing.

Why is the chart interesting? The automatic spending reductions (also known as the sequester) came into force last Friday as a result of long-running disagreement between the political parties in the US over how to deal with their deficit.  There will be an initial $42bn cut in spending, to be divided equally between defence and non-defence budgets, and further cuts going on over the next ten years or so. It is hard to predict the effect of the cuts on individual budgets, but the Congressional Budget Office have produced a projection for the effect on the deficit over the coming decade.

What is particularly striking is the lack of any long-term effect on the deficit.  Based on their forecasts, the deficit will fall until 2015, but then rise again.  By 2023, it will not be far from current levels, and the US might have to deal with this all over again.