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Recession averted, but rising debt still a threat, CBO warns

The CBO forecast on the economy describes the dilemma lawmakers face. Their successful measures to avoid a recession have left in place an expected dangerous rise in the national debt.

By Staff writer / February 5, 2013

Congressional Budget Office (CBO) Director Douglas Elmendorf speaks at a news conference to release the CBO's annual 'Budget and Economic Outlook' report on Capitol Hill Tuesday.

Yuri Gripas/Reuters

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America won't go into recession this year, but the economy is threatened in the longer term by rising federal debt. That's what the Congressional Budget Office concludes in its latest annual forecast on the economy and the federal budget.

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The CBO, the government's fiscal scorekeeper, described a rock-and-a-hard-place dilemma for policymakers Tuesday as they seek to promote growth while containing the deficit.

On the one hand, it said the "fiscal tightening" in some recently enacted tax hikes and federal spending cuts could cut economic growth in half this year. The action by Congress to avoid the so-called fiscal cliff did avert a recession. But unless lawmakers make additional changes, the CBO forecasts that gross domestic product (GDP) will grow by just 1.4 percent for the year, compared with a no-tightening scenario of 2.9 percent growth.

On the other hand, Congress still hasn't addressed a dangerous rise in the national debt. That means more fiscal tightening will be needed.

The CBO forecast finds a persistent mismatch between tax revenue and spending over the coming decade. As the economy improves, tax revenue should rise to 19 percent of GDP for the period from 2015 through 2023, up from 15.8 percent in 2012, the report said. But federal spending, after an early-decade dip, will start rising persistently faster than revenues.

"After 2017, if current laws remain in place, outlays will start growing again as a percentage of GDP," the CBO said. "The aging of the population, increasing health care costs, and a significant expansion of eligibility for federal subsidies for health insurance will substantially boost spending for Social Security and for major health care programs relative to the size of the economy."

The CBO's current-law "baseline" calls for spending to reach about 23 percent of GDP in 2023 and, more worrisome, to be "on an upward trajectory."
Congress's bean counters don't get formally involved in policy debates, but this report provides important context for both sides in a contentious debate over a "sequester" (automatic spending cuts) that is scheduled to hit much of the federal budget on March 1.

Many Democrats want to withdraw from the sequester, to avoid sharp cuts in useful discretionary programs and to avoid a needless slowdown of the economy. Many Republicans support the cuts, or some similar show of spending restraint, as a way to buoy private-sector confidence that the nation can get its fiscal house in order.

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