- The Washington Times - Tuesday, February 12, 2008


Noting that it was “very clear” that the risk of recession had become “substantially elevated” in recent months, Congressional Budget Office (CBO) Director Peter Orszag suggested yesterday that the annual budget deficit could exceed $500 billion in fiscal 2008 and 2009 in the event of an economic downturn.

The math was pretty straightforward, he explained to reporters and editors at The Washington Times. Including the economic-stimulus package and the additional outlays the Bush administration has requested for the war on terror, both the White House and the CBO are forecasting a fiscal 2008 budget deficit of roughly $400 billion. But the administration’s fiscal 2009 budget projected an economic growth rate of 2.7 percent in calendar 2008 and 3 percent next year. If a recession occurs instead, then the deficit could pierce the $500 billion per year ceiling.

Annual deficits of $500 billion (3.5 percent of gross domestic product, or GDP) in the short term would seem relatively manageable compared to the nation’s long-term fiscal outlook, which CBO has repeatedly characterized as “unsustainable” and “unstable.” CBO’s 75-year, long-term “fiscal gap” (based on its “alternative fiscal scenario”) amounts to 6.9 percent of GDP. Under this scenario, “by 2050, rising federal debt would reduce the capital stock by more than 40 percent and real GDP by more than 25 percent,” CBO reported in its December “Long-Term Budget Outlook.”

It is imperative that policy-makers understand the nature of this “fiscal gap.” The CBO’s “extended-baseline scenario” assumes that the 2001 and 2003 tax cuts will expire at the end of 2010 and that a slew of other tax cuts, which are routinely extended, will also be allowed to expire. It further assumes that the alternative minimum tax (AMT) will no longer be indexed for inflation. By contrast, the “alternative fiscal scenario” assumes that the AMT will be indexed for inflation and the 2001 and 2003 tax cuts will be permanently extended. As the CBO explained in December, the fiscal gap of nearly 7 percent of GDP “represents the extent to which the government would need to immediately and permanently either raise tax revenues or cut spending — or do both, to some degree — to make the government’s debt the same size (in relation to the economy) at the end of that period [2082] as it was at the beginning [2008].”

Note well: Eliminating the “fiscal gap” does not require a balanced budget over the next 75 years. It would require that the ratio of publicly held debt to GDP (36.8 percent in 2007, which reflects an 11-percentage-point increase since 1981) would be no higher than 36.8 percent in 2082. Each year Congress and the White House fail to address the “fiscal gap” means the eventual adjustments will be more painful and severe. The “fiscal gap” needs to become a major issue in the 2008 elections.

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