WASHINGTON — The federal budget deficit is projected to decline sharply this year as spending on pandemic aid programs subsides and the economy continues to expand, the nonpartisan Congressional Budget Office said in new forecasts released on Wednesday.
The United States is expected to record a $1 trillion budget shortfall this year, down from $2.7 trillion in 2021, marking a return to the economy’s prepandemic trajectory. The C.B.O. expects inflation to moderate this year from last year, but to remain elevated, and said economic growth would be sluggish over the next two years.
The projections come at a time of great uncertainty for the U.S. economy, with the Federal Reserve raising interest rates to tame high inflation and supply chains still disrupted, a result of the pandemic and the war in Ukraine. The future of President Biden’s economic agenda is also in limbo, with Democrats hoping to pass new legislation ahead of the November midterm elections. Most of their ambitions for major investments have been stalled by political gridlock.
C.B.O. officials said inflation was likely to be higher than they projected because the report did not account for the full impact of Russia’s war in Ukraine on food and energy prices around the world.
“Geopolitical events, including Russia’s invasion of Ukraine, add to the uncertainty of the economic outlook, notably the outlook for inflation,” the report said.
Understand Inflation and How It Impacts You
As it stands, the C.B.O. expects inflation to moderate next year but remain above the 2 percent annual average that the Federal Reserve shoots for. Slower consumer spending will blunt economic output in the next year, and gross domestic product is projected to grow 3.1 percent this year and at an average annual rate of 1.6 percent through 2026.
Mr. Biden has seized on the declining deficit as evidence that he is fiscally responsible and taking steps to combat inflation. However, many analysts have pointed out that the shrinking shortfall is the result of expiring stimulus programs rather than austerity measures.
Annual deficits averaged about $3 trillion over the last two years as the federal government pumped money into the economy to help Americans cope with the pandemic. The Biden administration faced criticism for the $1.9 trillion stimulus package that Democrats passed last year, with Republicans arguing that it fueled inflation.
Biden administration officials such as Treasury Secretary Janet L. Yellen have acknowledged that the money most likely fed into inflation but defended the package as necessary considering the great uncertainty facing the economy. C.B.O. officials said that the stimulus package did contribute to inflation but that they could not pinpoint to what extent it was responsible for the sharpest price increases in 40 years.
Despite the deficit decline, the C.B.O. said, debt remains a long-term problem for the United States. By 2032, debt held by the public is projected to reach 110 percent of gross domestic product, a record high, and the cost of interest on the debt is expected to double as a share of the economy.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
“Rapidly growing deficits as far as the eye can see are not good for wages, economic growth or our ability to invest in the future for the next generation,” said Michael A. Peterson, the chief executive officer of the Peter G. Peterson Foundation, which promotes deficit reduction.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, lamented that trillion-dollar deficits appeared to be here to stay and that by 2031 the annual shortfall would be back to $2 trillion, according to the C.B.O.
“This is no time to break out the champagne glasses,” Ms. MacGuineas said.