CBO Says Short-Term Deficit Cut Won’t Avert Fiscal Crisis

CBO Says Short-Term Deficit Cut Won’t Avert Fiscal Crisis

A short-term shrinkage of annual budget deficits since 2009 won’t reverse the 25-year growth of U.S. debt that requires Congress to avert a long-term fiscal crisis by choosing among spending cuts, tax increases or a combination of both, the Congressional Budget Office said today. The nonpartisan agency said that the sooner Congress strikes a closer balance between tax revenues and expenditures, the easier it will be to implement policy changes with minimal economic disruption. The options confronting lawmakers are raising taxes, cutting spending for entitlements such as Medicare and Social Security, or a combination of the two, the CBO said in its annual report on long-term budget projections.An almost 60 percent reduction since 2009 in annual federal budget deficits — measured as a percentage of gross domestic product — won’t significantly alter the 25-year trajectory of the growth in publicly held debt, the CBO said.

It’s caused by an aging population that will strain the resources of Medicare and Social Security. Federal spending will rise from 22 percent of GDP in 2012 to 26 percent in 2038 under current law, the CBO said. The deficit would be 6.5 percent of GDP that year, greater than any year between 1947 and 2008, the report said.

Under an alternate economic scenario that assumes current policies remain in place in 2038, publicly held debt would make up 190 percent of GDP. That scenario assumes that automatic spending cuts that took effect in 2011 would be lifted. That could heighten the risk of a financial crisis, CBO said.

‘More Difficult’

“At some point, investors would begin to doubt the government’s willingness or ability to pay U.S. debt obligations, making it more difficult or more expensive for the government to borrow money,” the report said. “The risk of a fiscal crisis — in which investors demanded very high interest rates to finance the government’s borrowing needs — would increase.”

The report comes as a politically divided Congress faces the risk of a government shutdown on differences over legislation to finance the government after the Oct. 1 start of the 2014 fiscal year. Many House Republicans want to condition any new spending with a provision to defund or delay the implementation of the health-care law enacted in 2010. Also looming in the coming weeks is the expiration of the government’s borrowing authority, which may become the focus of the same policy fight.

President Barack Obama and other Democrats are seeking an end to the automatic spending cuts, known as sequestration, that were enacted as part of the 2011 deal to raise the debt limit.

Partisan Divisions

The president has called for different spending cuts plus limits on tax deductions for the wealthiest earners to lower deficits. Republicans in Congress have said that they won’t agree to any more tax increases, citing the January rise in the tax rate on annual income of more than $400,000 for individuals and more than $450,000 for married couples.

Obama said yesterday that it would be the “height of irresponsibility” for Republicans to risk a government shutdown or a default on U.S. debt by pressing their policy demands. “I will not negotiate over the full faith and credit of the United States,” he said in remarks at the White House noting the five-year anniversary of the financial crisis.

Treasury Secretary Jacob Lew reinforced that message today in remarks to the Economic Club of Washington.

“The time to make policy is before, not after, we have made commitments,” he said, according to the prepared text. “Elected leaders have a responsibility to make our economy stronger, not to create manufactured crises that inflict damage.”

‘Historically High’

The CBO projections reflect the comments that Director Douglas Elmendorf made Sept. 12 at an economics policy conference in Washington.

“The federal budget deficit has fallen faster than we expected a few years ago,” he said in a blog post that day on CBO’s website. “However, relative to the size of the economy, debt remains historically high and is on an upward trajectory in the second half of the coming decade.”

“The fundamental budgetary challenge has hardly been addressed,” he wrote.

To gradually cut the debt from its current level of 73 percent of GDP to the 40-year average of 38 percent of GDP, Congress would have to cut it by 1 percent of GDP for each of the next 35 years, he said.

To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net