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Congressional Budget Office Estimates Economic Impact of Trade Policy Decisions

On 28 January, the non-partisan Congressional Budget Office published its updated budget and economic outlook for the current year as well as the next decade. In remarks delivered to the press upon release of the new report, Keith Hall, who has led the CBO since 2015, noted that the U.S. government’s debt is already large and budget deficits over the next decade and beyond are projected to keep increasing in relation to the size of the economy.

The U.S. deficit is predicted to grow as a result of the increased costs of health and retirement benefits to a growing U.S. elderly population as well as increased interest payments on current and future debt. On the growth side, he estimated that revenue growth would slow; although some of the Trump administration’s tax cuts are scheduled to expire and thus increase government revenue, the working population will decline and overall economic growth is therefore projected to slow, thus reducing government revenue.

Hall projected that debt as a share of economic output would eventually reach its highest level in U.S. history, higher than even at the highest previous point just after World War II. The CBO also estimated the economic effect of the recent five-week partial government shutdown, stating that the level of U.S. GDP for calendar year 2019 is expected to be 0.02 percent smaller than it would have been otherwise.

As part of his comments, Hall summarised the budget and economic effects of recent changes in trade policy. The CBO based its forecast on the assumption that all recently implemented changes to trade policy, both by the United States and its trading partners, would be permanent. Making this assumption for the next 10 years, the CBO director predicted that on net “the new tariffs on both imports and exports will reduce U.S. real GDP by about 0.1 percent, on average, through 2029.” The changes in trade policy “also increase uncertainty among investors, which may further reduce U.S. output.” CBO’s estimates of the economic effects of the new tariffs are subject to considerable uncertainty, particularly over the longer run.

The report further observes that “U.S. tariffs reduce U.S. economic activity primarily by reducing the purchasing power of U.S. consumers’ income as a result of higher prices and by making capital goods more expensive.” Democratic Senate Minority Whip Dick Durbin took the opportunity to comment on President Trump’s trade policy, noting that the non-partisan CBO “tells us that his scorched-Earth trade policy comes with a cost” whose brunt will be borne by U.S. consumers, businesses and farmers.

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