CBO's math on budget deficit presents daunting choices for US

The gloomy outlook for the federal budget deficit, outlined by the CBO director Wednesday, comes as politicians and economists are arguing over what the US economy needs most: another jolt of government stimulus or sharp spending cuts.

By , Staff writer

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    A worker emerges from one of the warren of offices making up the Congressional Budget Office in Washington, DC.
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The top number-cruncher for Congress issued a blunt message Wednesday to a nation still struggling to recover from recession: Get ready to cut federal spending "sharply," to raise taxes, or both.

That's what it will take, said Congressional Budget Office Director Douglas Elmendorf, to avert an unsustainable rise of government debt that could otherwise hobble America's economic growth.

He released the CBO's latest report on the long-term outlook for federal finances at a sensitive moment in both economic and political terms. The recovery from recession so far has been tepid, and massive deficit spending has been central to the government's effort to lift the economy. Yet the national debt is now growing so rapidly that the leeway to undertake more deficit spending, without crimping the economy, may be diminishing.

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These concerns are spilling over into a heated election-year battle, with Republicans pressing the case that runaway government spending is the economy's problem, not the solution. Mr. Elmendorf didn't say to cut spending or raise taxes immediately, but he also warned about the risks of waiting too long.

"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," Elmendorf wrote on the CBO website.

The stakes for ordinary Americans were illustrated in two charts in his report.

One chart showed a forecast that economic output per person will tend to rise under normal economic conditions (about 1.5 percent year), but would stagnate or even fall if rising government debt "crowds out" the ability of the private sector to make productivity-enhancing investments. In essence, Elmendorf and other CBO economists are warning that the debt poses a direct threat to economic growth and rising living standards.

A second chart showed the benefits of addressing the budget imbalance sooner rather than later. The problem will become twice as hard to solve, in terms of the scale of spending cuts or tax hikes, if America waits until 2025 to take action, compared with actions that begin in 2015.

Already, the CBO report said, the government's official debt to the public is in the process of surging from about 40 percent of gross domestic product (GDP) as the recession began to 62 percent by the end of this year – the highest level as a share of the economy since the period just after World War II.

After issuing the report, Elmendorf presented his views to a fiscal commission created by President Obama, which plans to propose budget solutions later this year. The panel includes Democrats and Republicans, including some who now sit in Congress.

The commission's give-and-take with Elmendorf offered some glimpses of the tough choices and volatile politics that lie ahead.

"As I heard you describe it, what's going to be necessary [is] either a 25 percent increase in taxes or a 20 percent reduction in spending, or some combination thereof," said Sen. Kent Conrad (D) of North Dakota. "Is that correct?"

"That's the order of magnitude, yes," Elmendorf replied.

Such large changes don't need to happen all at once. But if nothing is done, the cost of servicing debt will keep rising as a share of federal spending. With the Greek debt crisis serving as a reminder of what can go wrong, debate has been growing lately about whether the Bush tax cuts should be made permanent for most Americans or partially phased out.

The fiscal commission's Republican co-chair, former Sen. Alan Simpson of Wyoming, didn't weigh in on that specifically. But he stuck his neck out by arguing that fellow Republicans should remember that even Ronald Reagan raised taxes at times.

The biggest budget problem, in the long term, is the rising cost of health care.

The CBO view incorporates a forecast that Mr. Obama's health-care reform law will increase federal health-care spending for most of the next 20 years. Then, about 2030, the law will "slightly reduce federal spending for health care if all of its provisions are fully implemented," Elmendorf said.

That leaves plenty of room for politicians to spar about the law. But, whether it's good or bad, the law doesn't fix the budget challenge regarding health care, budget experts say.

Elmendorf summed up his own view this way: "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 CBO’s projections, or some combination of those approaches."

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