–Congressional Budget Office: Need ‘Large and Timely’ Fiscal Reforms
–CBO: Plausible Scenario Shows Public Debt Hitting 200% of GDP in ’37
–Republican Leaders Call For 1-Year Extension of Bush Era Tax Cuts
–Quiet Bipartisan Talks Continue On End of Year Deficit Deal

By John Shaw

WASHINGTON (MNI) – Congress received another grim warning this week
from the Congressional Budget Office which said that “large and timely”
changes must be made to U.S. fiscal policy to put the nation on a more
sustainable — and less dangerous — budget trajectory.

In its annual report on the U.S.’s long-term fiscal outlook, the
CBO said Tuesday the combination of an aging American population and
rising health care costs will put the nation on a perilous fiscal path
unless reforms are implemented.

The CBO notes that the U.S.’s public debt has jumped from 40% of
GDP in 2008 to more than 70% of GDP by the end of this year.

“The sharp rise in debt stems partly from lower tax revenues and
higher federal spending caused by the severe economic downturn and from
policies enacted during the past few years,” the CBO said.

“However, the growing debt also reflects an imbalance between
spending and revenues that predated the recession,” it added.

The CBO report says that if current policies are maintained,
spending on major federal health care programs alone would grow from
more than 5% of GDP today to almost 10% in 2037 and then continue to
jump.

The CBO outlines two future fiscal scenarios: one which assumes
that current laws remain intact such as the expiration of the Bush era
tax cuts and across-the board-spending cuts; and a second that assumes
that adjustments are made to the baseline that more closely reflect the
fiscal policy that has been approved in recent years.

In the first scenario, which would lead to higher revenues and
lower spending than the historic norm, public debt would fall to about
53% of GDP by 2037.

In the second scenario, which would result in much lower revenues
and higher spending than the first scenario, public debt would approach
200% of GDP by 2037.

“The explosive path of federal debt under the alternative scenario
underscores the need for large and timely policy changes to put the
federal government on a sustainable fiscal course,” the CBO says.

The CBO report says clearly that U.S. fiscal policy must change.

“The aging of the U.S. population and the rising costs for health
care mean that the combination of budget policies that worked in the
past cannot be maintained in the future,” CBO says.

“To keep deficits and debt from climbing to unsustainable levels,
as they will if the current set of policies is continued, policymakers
will need to increase revenues substantially above historical levels as
a percentage of GDP, decrease spending significantly from projected
levels, or adopt some combination of those two approaches,” it adds.

Doug Elmendorf, the director of the CBO, testified on the report
Wednesday before the House Budget Committee and amplified its central
themes.

On another fiscal matter, House Speaker John Boehner and Senate
Minority Leader Mitch McConnell said this week that Congress should pass
legislation soon to renew the Bush era tax cuts for one year, ensuring
some modicum of certainty and setting the stage for a major tax reform
effort next year.

At a joint briefing, Boehner and McConnell said a one year
extension would provide needed certainty for an economy that is fragile.

“It’s pretty obvious that the economy needs the certainty of the
extension of the current tax rates for at least a year,” McConnell said.

“That would give us the time to begin to grapple with something we
all agree we need to do on a bipartisan basis, which is to reform the
whole tax code. That hasn’t been done in a quarter of a century,” he
added.

Boehner agreed that a one year extension of the Bush tax cuts is
critical.

“It’s really important that we provide some certainty to job
creators in our country and extending all of the current tax rates for
at least a year is really important if we are going to help job creators
gain a little more confidence and put Americans back to work,” Boehner
said.

The push for a one year extension of the Bush tax cuts by the
Republican leaders is part of their strategy for avoiding the so-called
fiscal cliff.

This refers to the convergence of three key fiscal events: the
expiration of the Bush era tax cuts at the end of 2012, the scheduled
imposition of across-the-board spending cuts, and the need for another
debt ceiling increase.

House Republican leaders have said they will hold the tax cut
extension vote in July.

Senate Republicans will presumably try to push the tax cut
extension this summer by trying to pass it as an amendment to other
legislation. Senate Democrats will likely try to block a direct vote on
the GOP plan.

CBO director Elmendorf said Wednesday that the cost of renewing the
Bush era tax cuts for a decade would be more than $4 trillion.

Finally, informal talks continued this week among several
bipartisan groups of senators as they try to assemble a major
deficit reduction package.

On Tuesday, a group of more than two dozen senators received an
economic briefing from William Dudley, president of the New York Federal
Reserve Bank, and Robert Zoellick, the outgoing president of the World
Bank.

Senate Budget Committee Chairman Kent Conrad and Senate Finance
Committee Chairman Max Baucus hosted a review of fiscal policy issues
Thursday with a group of lawmakers and former White House budget
director Peter Orszag.

Baucus is set to give what is being billed as a major speech on tax
reform this coming Monday.

In a recent interview, Conrad said intense behind-the-scenes
bipartisan talks are underway to assemble a major deficit reduction
package based on the Simpson-Bowles deficit reduction plan.

Conrad said the meetings are organized both to review fiscal
options and assemble, draft, and score a major deficit reduction package
that would update and put into legislative language the central elements
of the Simpson-Bowles plan.

Conrad said he is working with lawmakers both within the Senate
Budget Committee and in informal groups such as the “Gang of Six” to
develop a deficit reduction package.

Staffers say the budget talks have involved an ever shifting group
of lawmakers from both parties who are open to supporting a major
deficit reduction plan later this year.

“This is incredibly detailed, difficult work. It takes months and
months of careful preparation to be ready with a plan. Some of us are
determined to be ready pretty soon with a plan. We hope the political
moment comes that allows us to move the package,” Conrad said.

The Simpson-Bowles plan calls for more than $4 trillion in deficit
reduction over a decade, with spending cuts and tax increases. It would
reduce spending to about 22% of GDP by 2022 and bring revenues up to
about 21% of GDP in 2022.

Some lawmakers believe there may be a window to push a major
deficit reduction plan after the November elections, in the weeks before
the Bush tax cuts are set to expire, across-the-board spending cuts are
triggered, and the debt ceiling must be raised.

** MNI Washington Bureau: (202) 371-2121 **

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