WASHINGTON (MNI) – The following are excerpts from a statement by
the Congressional Budget Office Tuesday following the release of a
report on the long-term budget outlook:
The explosive path of federal debt under the alternative fiscal
scenario underscores the need for large and timely policy changes to put
the federal government on a sustainable fiscal course. 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. In fact, the
current laws that underlie CBO’s baseline projections provide for
significant changes of those kinds in coming years; many other
approaches to constraining future deficits are possible as well.
But policymakers face difficult trade-offs in deciding how quickly
to implement policies to reduce budget deficits. On the one hand,
cutting spending or increasing taxes slowly would lead to a greater
accumulation of government debt and might raise doubts about whether
longer-term deficit reduction would ultimately take effect.
On the other hand, abruptly implementing spending cuts or tax
increases would give families, businesses, and state and local
governments little time to plan and adjust, and would require more
sacrifices sooner from current older workers and retirees for the
benefit of younger workers and future generations. In addition,
immediate spending cuts or tax increases would represent an added drag
on the weak economic expansion.
—
What Is the Budget Outlook Under the Extended Baseline Scenario?
Under the extended baseline scenario, which generally adheres
closely to current law, federal debt would gradually decline over the
next 25 yearsfrom an estimated 73 percent of GDP this year to 61
percent by 2022 and 53 percent by 2037. That outcome would be the result
of two key sets of policy assumptions:
– Under current law, revenues would rise steadily relative to GDP
because of the scheduled expiration of cuts in individual income taxes
enacted since 2001 and most recently extended in 2010, the growing reach
of the alternative minimum tax (AMT), the tax provisions of the
Affordable Care Act, the way in which the tax system interacts with
economic growth, demographic trends, and other factors; revenues would
reach 24 percent of GDP by 2037much higher than has typically been seen
in recent decadesand would grow to larger percentages thereafter.
– At the same time, under this scenario, government spending on
everything other than the major health care programs, Social Security,
and interestactivities such as national defense and a wide variety of
domestic programswould decline to the lowest percentage of GDP since
before World War II.
That significant increase in revenues and decrease in the relative
magnitude of other spending would more than offset the rise in spending
on health care programs and Social Security.
What is the Outlook Under the Extended Alternative Fiscal Scenario?
The budget outlook is much bleaker under the extended alternative
fiscal scenario, which maintains what some analysts might consider
“current policies,” as opposed to current laws. Federal debt would grow
rapidly from its already high level, exceeding 90 percent of GDP in
2022. After that, the growing imbalance between revenues and spending,
combined with spiraling interest payments, would swiftly push debt to
higher and higher levels. Debt as a share of GDP would exceed its
historical peak of 109 percent by 2026, and it would approach 200
percent in 2037.
The changes under this scenario would result in much lower revenues
than would occur under the extended baseline scenario because almost all
expiring tax provisions are assumed to be extended through 2022 (with
the exception of the current reduction in the payroll tax rate for
Social Security). After 2022, revenues under this scenario are assumed
to remain at their 2022 level of 18.5 percent of GDP, just above the
average of the past 40 years.
Outlays would be much higher than under the other scenario. This
scenario incorporates assumptions that through 2022, lawmakers will act
to prevent Medicare’s payment rates for physicians from declining; that
after 2022, lawmakers will not allow various restraints on the growth of
Medicare costs and health insurance subsidies to exert their full
effect; and that the automatic reductions in spending required by the
Budget Control Act of 2011 will not occur (although the original caps on
discretionary appropriations in that law are assumed to remain in
place).
Finally, under this scenario, federal spending as a percentage of
GDP for activities other than Social Security, the major health care
programs, and interest payments is assumed to return to its average
level during the past two decades, rather than fall significantly below
that level, as it does under the extended baseline scenario.
What Is the Impact of Growing Deficits and Debt?
The projections discussed above understate the severity of the
long-term budget problem under the extended alternative fiscal scenario
because they do not incorporate the negative effects that additional
federal debt would have on the economy. In particular, large budget
deficits and growing debt would reduce national saving, leading to
higher interest rates, more borrowing from abroad, and less domestic
investmentwhich in turn would lower the growth of incomes in the United
States.
Taking those effects into account, CBO estimates that gross
national product (GNP) would be lower under the extended alternative
fiscal scenario than it would be if debt remained at the 61 percent of
GDP it would reach in 2022 under the extended baseline scenario. The
reduction in GNP would lie in a broad range around 4 percent in 2027 and
in a broad range around 13 percent in 2037. (Under the extended baseline
scenario, GNP would be nearly identical to what it would be if the
nation’s debt burden remained constant.)
Rising debt also would have other negative consequences beyond
those estimated effects on output. It would:
– Result in higher interest payments on that debt, which would
eventually require higher taxes, a reduction in government benefits and
services, or some combination of the two.
– Restrict policymakers’ ability to use tax and spending policies
to respond to unexpected challenges, such as economic downturns or
financial crises.
– Increase the probability of a sudden fiscal crisis, during which
the government would lose its ability to borrow at affordable rates.
** MNI Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MFU$$$,MCU$$$,M$$CR$]
