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CBO warns tariffs could hurt economic growth

Jessica Smith

The Congressional Budget Office said on Wednesday it expects federal deficits to grow much more than previously expected —adding that ongoing U.S.-China trade tensions could slow economic growth.

In a new report, the CBO said over the next decade, the federal government’s red ink will flow much deeper than forecast — primarily because of the bipartisan budget deal passed last month.

But as America spars with its major trading partners over trade, the nonpartisan budget watchdog added that because of tariffs, U.S. growth will likely be 0.3% smaller than it otherwise would have been by 2020.

“Tariffs reduce domestic GDP mostly by raising domestic prices, thereby reducing the purchasing power of consumers and increasing the cost of business investment,” the CBO said in a blog post.

“Tariffs also affect business investment by increasing businesses’ uncertainty about future barriers to trade and thus their perceptions of risks associated with investment in the United States and abroad,” it added.

‘Significant changes’ needed

According to the CBO’s report, the U.S. budget deficit is now expected to reach $960 billion in 2019 — $63 billion more than the last projection in May.

Meanwhile, the new budget deal reached between Congress and the White House will add around $1.7 trillion to the cumulative deficits between 2020 and 2029, the agency said.

The expected jump will partly offset by a drop in interest costs, helped by interest rates that have sunk to record lows in recent days. Those savings translate into a $1.1 trillion net reduction in the CBO’s projections over the following 10 years, the agency said.

Still, the deficit is now expected to average $1.2 trillion per year between 2020-2029. Over the next ten years, the deficit is expected to expand by $809 billion more than previously projected.

The federal debt held by the public is expected to grow from 79% of GDP in 2019 to 95% of GDP in 2029 — the highest level of debt since the end of World War II, according to the report.

The CBO says federal debt is on an unsustainable course and will rise even higher after 2029, because of the aging population, growth in health care and rising interest costs.

“To put it on a sustainable course, lawmakers will have to make significant changes to tax and spending policies—making revenues larger than they would be under current law, reducing spending below projected amounts, or adopting some combination of those approaches,” said the report.

Jessica Smith is a reporter for Yahoo Finance based in Washington, D.C. Follow her on Twitter at @JessicaASmith8.

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