Thursday, January 28, 2010

The director of the nonpartisan Congressional Budget Office had little but bad news on the economy for Congress.

The pace of the U.S. economic recovery will be “slow in the next few years,” and the unemployment rate will average 10 percent through the end of fiscal 2011, while the annual budget deficit will likely remain above $1 trillion, CBO chief Douglas Elmendorf told the House Budget Committee on Wednesday.

The CBO chief told the congressional panel that he expected economic growth in fiscal 2010, which ends Sept. 30, will be just 1.6 percent, and the unemployment rate will average 10.2 percent. The outlook for fiscal 2011 is not much better, he warned, saying that growth in the nation’s gross domestic product (GDP) will barely accelerate to 1.8 percent and the unemployment rate barely budge, averaging 9.8 percent for the year.

Mr. Elmendorf, citing another in the string of forecasts that his well-respected nonpartisan office had developed, also warned that annual budget deficits are likely to top $1 trillion for this year and next and remain at stratospheric levels for years. The resulting public debt will make up a huge share of the overall economy and remain a constant threat to economic growth for the foreseeable future.

“It is true that as we push [publicly held debt] in this country to 60 percent of GDP at the end of this [fiscal] year and beyond that over the next few years, we’re moving into territory that most developed countries stay out of,” Mr. Elmendorf told the House budget panel. “That raises the risk” of seriously adverse economic consequences “every step that we go.”

Mr. Elmendorf went into the details of CBO’s rules for counting budget deficits, which he said require unrealistic assumptions and thus understate the size of likely future deficits. CBO is required by statute to prepare its budget “baseline” according to “current law,” as opposed to “current policies,” regardless of whether the law is likely to change.

For example, under current law, all the Bush tax cuts will expire on Dec. 31, 2010; the Alternative Minimum Tax is not adjusted for inflation (and is thus assumed to ensnare 30 million more families in the future); and annual appropriations are projected to rise by the rate of inflation, not by the nominal GDP growth.

However, Mr. Obama has vowed not to let expire Bush-era tax cuts that benefit the middle class and not to allow the alternative minimum tax (AMT) from afflicting millions of middle- and upper-middle-income households. And congressional spending increases have been more closely followed nominal economic growth than inflation.

Mr. Elmendorf specifically said that his agency’s 2011-2020 “baseline” projections of $6 trillion in cumulative budget deficits and a publicly held debt reaching 67 percent of GDP in 2020 were therefore unrealistic.

“If the tax cuts were made permanent, the AMT was indexed for inflation and annual appropriations kept pace with GDP, the deficit in 2020 would be nearly the same, historically large, share of GDP that it is today,” between 9 [percent] and 10 percent, “and debt held by the public would equal nearly 100 percent” of the economy’s size, Mr. Elmendorf reported in his prepared testimony.

When CBO examined Mr. Obama’s 10-year budget blueprint that accompanied his 2010 budget, it concluded in June that cumulative deficits would exceed $9 trillion during the 2010-2019 period and debt held by the public would triple from $5.8 trillion at the end of fiscal 2008 to $17.1 trillion at the end of fiscal 2019.

Even under the far-more-optimistic deficit scenario contained in CBO’s baseline projections, House Budget Committee Chairman John M. Spratt Jr., South Carolina Democrat, pointed out that annual net interest payments would more than triple from $207 billion in 2009 to $723 billion in 2020.

“We tend to think of Social Security and Medicare and Medicaid as being the entitlements of great concern to us,” Mr. Spratt observed. “Interest on the national debt is truly obligatory. It has to be paid. It’s an entitlement in the strongest sense of the word.”

Even if Congress approves the president’s plan to freeze domestic discretionary spending for three years beginning in fiscal 2011, it would have just a modest effect on deficits and federal spending over the next 10 years, argued Rep. Jeb Hensarling, Texas Republican.

The White House estimates that a three-year freeze in domestic discretionary spending would save $250 billion over 10 years. That’s less than 3 percent of projected deficits.

Mr. Elmendorf called it “a small step.”

Mr. Hensarling also noted that the Democrat-controlled Congress increased nondefense discretionary spending by 10.3 percent in fiscal 2009 and 12.3 percent in 2010. The freeze, therefore, would begin following massive increases, he pointed out.

Given that Mr. Obama’s 2010 budget projected raising total federal spending from $3.55 trillion in 2010 to $5.16 trillion in 2019, Mr. Hensarling observed that the president’s freeze is “a proposal to raise federal spending 44.3 percent, as opposed to 45 percent” over the next 10 years.

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