August 24, 2016

The nonpartisan Congressional Budget Office (CBO) this week released its annual mid-year update of its budget and economic forecasts. The report, which can be read here, projects that the unified federal budget deficit for the ongoing fiscal year (2016), which was projected to be $534 billion in CBO’s earlier March forecast, will now be about $590 billion.

The culprit, according to CBO: “Tax collections from individual and corporate income taxes have been lower in recent months than CBO expected in March—and by much more than is explained by currently available economic data. The main factors responsible for the shortfall will be clearer when additional data from tax returns and other sources become available.”

The major macroeconomic projections have not changed substantially since March – anemic economic growth averaging just under 2 percent in real terms over the next decade, with low inflation and an unemployment rate of about 5 percent.

In terms of the overall budget picture, CBO again projects that current laws and policies will result in health care and Social Security spending crowding out discretionary outlays (which include almost all transportation spending):

Not shown as a line item above but included in the overall deficit calculation is a key intersection of the economic outlook and the budget deficit: the cost of paying interest on the national debt.

The table at the bottom of this page shows that CBO predicts that the cost of medium-term federal borrowing will almost double over the next ten years, from anticipated interest rates on 10-year Treasury notes going from 1.9 percent this year to 3.6 percent in 2026. This, combined with the extra debt added each year via the deficits indicated above, will cause federal spending on net interest on the debt to rise from $223 billion last year to $712 billion in 2026. As a percentage of federal spending, this would almost double from 6.0 percent last year to 11.4 percent in 2026. And as a share of gross domestic product, net interest would double from 1.3 percent last year to 2.6 percent in 2026.

What does all this have to do with transportation specifically? First of all, as mentioned earlier, almost all federal spending on transportation and infrastructure is currently classified as discretionary outlays, and as shown in the table above, the current trend is for that kind of spending to gradually get squeezed out as the inexorable arithmetic of an aging population and rising health care costs push those program costs ever-higher.

Second, even though both major party presidential nominees this fall have expressed support for large increases in infrastructure spending, that money has to come from somewhere – tax increases, offsetting spending cuts, or borrowing. This also applies to proposals for an infrastructure bank – as noted in the recent ETW analysis, an I-Bank would require someone – either the Bank itself or the Treasury, depending on the structure – to float tens or hundreds of billions of dollars of additional debt to finance infrastructure projects. An I-Bank is therefore also tied up in the overall federal debt and interest rate environment.

The bottom line from CBO: the era of ultra-low federal borrowing costs is soon coming to an end.

Transportation itself is scarcely mentioned in the CBO summary document, but CBO also posted some much more detailed data on its website, including an Excel spreadsheet of every budget account and another spreadsheet of detailed revenue projections.

A look at the detailed revenue data shows that estimated excise tax receipts for the Highway Trust Fund over the period of the FAST Act (fiscal 2016-2020) have dropped slightly since the March forecast – by $1.4 billion, or just under one percent. This has more to do with fluctuations in the estimates of future purchases of trucks and trailers and the usage tax on heavy trucks than it does with fuel purchases.

(In answer to a question submitted last week, CBO indicated that this baseline is premised on a 50 percent likelihood of the EPA/NHTSA preliminary rule on heavy truck fuel efficiency being finalized. Now that the final rule has been published, CBO’s next baseline will fully take into account the estimated effects of that rule on truck sales and diesel fuel consumption. ETW speculated on the effects of the final rule on the HTF last week, here.)

A close look at the account-by-account spending estimates shows that the estimated HTF spending over the life of the FAST Act has increased slightly ($1.1 billion) due to an increase in the FY16-17 spending estimate for the federal highway program, which is apparently spending its money slightly more efficiently and quickly than CBO had assumed in March.

CBO did not publish an update of its rounded-to-the-billion-dollars projection of HTF cash flow (the March version is here). That projection showed the Highway Account having a balance of about $17 billion upon the September 2020 expiration of the FAST Act, and the Mass Transit Account having a balance of about $3 billion. This week’s recalculation will lower the end-of-FAST projected HTF balance by about $2.5 billion, most of that coming from the Highway Account.

This is not a cause for concern – yet. Estimates for future spending and receipts fluctuate slightly between baselines all the time. But if this gets to be a habit – if re-estimates for spring and fall 2017 continue to show revenues dropping and spending speeding up a little bit more each time – the cumulative effect might become a problem, probably for the Mass Transit Account alone, before the end of the FAST Act.

CBO has also upgraded its assessment of how quickly the California high-speed rail project is spending its money from the 2009 ARRA stimulus law. As of the end of FY 2015, only $3.386 billion of the $8 billion in ARRA high-speed rail money had been spent via Treasury outlay. Underlying appropriations law requires that any ARRA money that has not been outlaid by September 30, 2017 is automatically repealed.

A CBO estimate earlier this year indicated that only $1.0 billion of the ARRA HSR money would be outlaid in FY16 and $1.1 billion in FY17, leaving $2.5 billion to evaporate on 9-30-2017. But this week’s forecast increases those spending estimates to $2.0 billion per year, leaving only about $600 million to evaporate unspent.