WASHINGTON (MNI) – The following is the second and final section of
the text of the Congressional Budget Office summary of its latest
long-term budget outlook, published Wednesday:
The budget outlook is much bleaker under the alternative fiscal
scenario, which incorporates several changes to current law that are
widely expected to occur or that would modify some provisions of law
that might be difficult to sustain for a long period. In this scenario,
CBO assumed that Medicares payment rates for physicians would gradually
increase (which would not happen under current law) and that several
policies enacted in the recent health care legislation that would
restrain growth in health care spending would not continue in effect
after 2020. In addition, under the alternative scenario, spending on
activities other than the major mandatory health care programs, Social
Security, and interest would fall below the average level of the past 40
years relative to GDP, though not as low as under the extended-baseline
scenario. More important, CBO assumed for this scenario that most of the
provisions of the 2001 and 2003 tax cuts would be extended, that the
reach of the alternative minimum tax would be kept close to its
historical extent, and that over the longer run, tax law would evolve
further so that revenues would remain at about 19 percent of GDP, near
their historical average.
Under that combination of policy assumptions, federal debt would
grow much more rapidly than under the extended-baseline scenario. With
significantly lower revenues and higher outlays, debt would reach 87
percent of GDP by 2020, CBO projects. After that, the growing imbalance
between revenues and noninterest spending, combined with spiraling
interest payments, would swiftly push debt to unsustainable levels. Debt
as a share of GDP would exceed its historical peak of 109 percent by
2025 and would reach 185 percent in 2035.
Neither of those scenarios represents a prediction by CBO of what
policies will be in effect during the next several decades. The policies
adopted in coming years will surely differ from those assumed for the
scenarios. (And even if the assumed policies were adopted, their
economic and budgetary consequences would certainly differ from those
projected in this report.) Nevertheless, these projections, encompassing
two very different sets of policy assumptions, provide a clear
indication of the serious nature of the fiscal challenge facing the
nation.
The Impact of Growing Deficits and Debt
In fact, CBOs projections understate the severity of the long-term
budget problem because they do not incorporate the significant negative
effects that accumulating substantial amounts of additional federal debt
would have on the economy:
— Large budget deficits would reduce national saving, leading to
higher interest rates, more borrowing from abroad, and less domestic
investmentwhich in turn would lower income growth in the United States.
— Growing debt would also reduce lawmakers ability to respond to
economic downturns and other challenges.
— Over time, higher debt would increase the probability of a
fiscal crisis in which investors would lose confidence in the
governments ability to manage its budget, and the government would be
forced to pay much more to borrow money.
Keeping deficits and debt from growing to unsustainable levels
would require raising revenues as a percentage of GDP significantly
above past levels, reducing outlays sharply relative to CBOs
projections, or some combination of those approaches. Making such
changes while economic activity and employment remain well below their
potential levels would probably slow the economic recovery. 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.
Earlier action would require more sacrifices by earlier generations to
benefit future generations, but it would also permit smaller or more
gradual changes and would give people more time to adjust to them.
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** Market News International Washington Bureau: 202-371-2121 **
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