–Congressional Budget Office Says U.S.’s Fiscal Challenges Mounting
–CBO Says Deficits Will Fall As Recovery Takes Hold –Then Rise Again
–Senate Budget Chief: Must Begin To Consider ‘Pivot’ To Deficit Cuts
–Key Budget Watchdog Group Sees Need For Entitlement and Tax Reform
By John Shaw
WASHINGTON (MNI) – Especially in recent years, reading the
Congressional Budget Office’s annual long-term fiscal report has been a
dispiriting, even depressing exercise.
It’s as if you are in a car that is heading steadily, inexorably,
toward a cliff and nobody seems able or willing to grab the steering
wheel or slam on the brakes. Ahead a calamitous event looms.
Reading this year’s report is a similar experience, only worse. The
car is still moving toward great danger, the cliff seems closer, the
fall ahead seems more dangerous than ever–and the margin for error is
The CBO’s director, Doug Elmendorf, presented CBO’s long-term
fiscal outlook to the White House’s deficit reduction panel Wednesday
and it had the expected sobering effect.
The CBO report notes that the U.S.’s debt held by the public grew
from 40% of gross domestic product at the end of 2008 to 62% of GDP
by the end of this year.
The CBO said that while this debt surge is closely related to the
recession, “the growing debt also reflects an imbalance between spending
and revenues that predated those economic developments.”
The CBO said that once the recovery takes firm hold, budget
deficits will probably decline “markedly” in the next few years.
“But over the long term, the budget outlook is daunting. The
retirement of the baby boom generation portends a significant and
sustained increase in the share of the population receiving benefits
from Social Security, Medicare and Medicaid,” it said.
The CBO report outlined two long-term budget scenarios, neither
Under the current law baseline, the CBO projects that public debt
will rise from 62% of GDP in 2010 to 87% of GDP by 2040 and 107% of GDP
But this scenario, budget experts observe, is highly optimistic
because it assumes all of the 2001 and 2003 tax cuts will expire, there
will be no adjustments to the alternative minimum tax, Medicare payments
to doctors will fall dramatically, all the cost savings in the health
care law are realized, and revenues rise to 30% of GDP.
Under a more realistic scenario, which does not make these
assumptions, the CBO said the public debt will rise to 87% of GDP by
2020, 223% of GDP by 2040 and a mind boggling 854% of GDP by 2080.
The CBO said the challenge for keeping deficits from reaching
“unsustainable levels” will require the U.S. to raise revenues as a
percentage of GDP “significantly above past levels” and reduce outlays
“sharply” relative to current projections.
The CBO report said that increasing revenues and cutting spending
during times of economic weakness pose clear dangers.
“However, the sooner that long-term changes to spending and
revenues are agreed on, and the sooner they are carried out once the
economic weakness ends, the smaller will be the damage to the economy
from growing federal debt,” the report says.
When Elmendorf presented the CBO report to the deficit panel
Wednesday, the members pressed him to explain the tension between
short-term stimulus and long-term deficit reduction.
“There is no intrinsic contradiction between providing additional
fiscal stimulus today while the unemployment rate is high and many
factories and offices are underused and imposing fiscal restraint
several years from now when output and employment will probably be close
to their potential,” he said.
Senate Budget Committee Chairman Kent Conrad said policymakers must
move in a careful way to boost growth now while preparing strong steps
to tackle long-term deficits.
“One of the challenges we face is that we must be careful not to
disrupt the nation’s economic recovery as we pivot to deficit
reduction,” he said in a statement.
“The federal response to the economic crisis of 2008 and 2009 has
succeeded in pulling us back from the brink. But the economy still faces
strong headwinds. We need to avoid the mistake of the 1930s, when
recovery measures were pulled back too quickly and the Great Depression
was prolonged. What we can and must do is put in place policies now that
will only kick in after the economy has more fully recovered,” he said.
In a policy paper released this week after the CBO report was
published, the Committee for a Responsible Federal Budget said major
changes in American fiscal policy are needed if the U.S. is to avoid a
fiscal crisis of historic dimensions.
“Though major changes should not occur until the economy has
recovered, a plan should be put in place immediately,” it said.
The group added that fiscal reforms should include further health
care reforms, Social Security reform, discretionary spending savings and
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