- The Washington Times - Friday, January 26, 2007

Echoing recent warnings by Government Accountability Office (GAO) Comptroller General David Walker and Federal Reserve Chairman Ben Bernanke, the nonpartisan Congressional Budget Office (CBO) reiterated its own warnings Wednesday by declaring that “the long-term budgetary picture continues to be worrisome.” After acknowledging that a “favorable outlook” could be inferred from its latest 10-year baseline projection, the budget office then lowered the boom with its bottom-line conclusion: “Either a substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy or some combination of spending and revenue changes will be necessary to promote the nation’s long-term fiscal stability.”

The favorable outlook was based on highly restrictive assumptions that the budget office had been statutorily required, until October 2006, to make in developing its baseline projections. Mr. Bernanke, referring to the decline of still-outsized full-employment budget deficits from $413 billion (2004) to $318 billion (2005) to $248 billion (2006), recently told the Senate Budget Committee: “Unfortunately, we are experiencing what seems likely to be the calm before the storm.” Whether it is the budget office’s necessarily contrived favorable outlook or Mr. Bernanke’s calm before the storm, it is clear that both the Congressional Budget Office and the Federal Reserve are in agreement with Mr. Walker of the GAO, who told the Senate Budget Committee on Jan. 11: “We are on an imprudent and unsustainable long-term fiscal path. And while the short-term deficits have improved in recent years, the long term is getting worse every second of every minute of every day, and the time for action is now.”

Each January the CBO takes a detailed look at the underlying trends affecting fiscal policy over the next decade and issues a comprehensive analysis replete with alternative policy scenarios. The CBO’s baseline budget projections are issued under the assumptions that (a) current laws (including, for example, the expiration of the 2001 and 2003 tax cuts at the end of 2010) would remain in effect over the next 10 years and (b) discretionary outlays would increase by the rate of inflation. Under these highly restrictive conditions, the CBO baseline projects a budget deficit of $172 billion in 2007, which would evolve into a budget surplus of $170 billion by 2012. Over the next five years (2013-17), annual budget surpluses would average $200 billion, culminating in a surplus of about $250 billion in 2017. When you add up the deficits and surpluses over the 2008-17 period, the net budget balance for the entire period is a $800 billion surplus.

What happens if you loosen the baseline assumptions? At a press conference announcing the study, new CBO Director Peter Orszag described one plausible scenario this way: “If, as an example of alternative policies, you assume that discretionary spending, excluding activities for the war on terrorism, kept pace with economic growth (with GDP), and that the tax provisions that are scheduled to expire from the 2001 and 2003 tax laws were instead continued, and that the [alternative minimum tax] was not allowed to take over a larger and larger share of the tax code — instead of a projected surplus in 2012 of $170 billion, one would have a deficit of $328 billion that year.” Thus, pursuing those highly plausible policy options would cause a budget shift from the baseline of nearly half a trillion dollars ($498 billion) in a single year. How might those policy alternatives play out over the decade? “[U]nder that change in policy path,” Mr. Orszag explained, “the deficit, instead of falling and moving into surplus, would rise from a little under 1.5 percent of GDP [in 2007] to 3.3 percent of GDP by 2017.” Here’s the kicker. “Over this 10-year period as a whole, instead of an $800 billion surplus, which is what the baseline shows, there would be a $4.2 trillion deficit.” Thus, the cumulative 10-year shift in the budget balance would be $5 trillion, or an average of $500 billion per year.

Between 2008 (when the first baby boomers begin drawing Social Security) and 2017, spending on age-related mandatory entitlement programs, including Medicare and Medicaid, will accelerate significantly. CBO projects the annual growth rate of Social Security spending will increase by nearly 50 percent, rising from 4.5 percent in 2008 to 6.5 percent in 2017. Spending on Medicare and Medicaid is expected to grow twice as fast nominal GDP over the next 10 years.

Then the bottom falls out. “Without major changes in policy,” the CBO report warned, “the combination of an aging population and rising health-care costs will cause a dramatic shift in the United States’ fiscal situation in the decades beyond 2017.”

The question is: Are the Republican White House and the Democratic Congress up to the challenge?

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