Budget Deficits Smaller, Yet Economy Remains Poor
The Congressional Budget Office (CBO) released a report of revised deficit projections in light of the recently passed Budget Control Act (BCA). Deficits have been cut in half, but unemployment is expected to remain high through 2012.
The CBO expects that, under current law, the United States will add $3.5 trillion to its national debt between 2012 and 2021. Before passage of the BCA, the CBO had projected that amount to be almost twice as much, or $6.7 trillion.
An important consideration, though, is that these projections are based upon current law, and few expect the current laws impacting budget deficits to actually remain as they are over the next decade.
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The CBO projections assume, for instance, that the Bush era tax cuts (which were extended under President Obama) will expire after 2012. Both political parties in Congress and Obama, however, want to see those tax cuts extended for middle-income wage earners, which would be a loss of revenue that the CBO accounted for in its projections.
The CBO also assumes that sharp reductions in doctor payments for Medicare services will go into effect after 2011 as part of the Affordable Healthcare Act of 2010. When Congress has tried to cut Medicare spending in the past, however, by cutting doctors payments, it has always rescinded the legislation before it actually went into effect.
The CBO also assumes that the Joint Select Committee on Deficit Reduction, sometimes called the “Super Committee,” will reduce federal budgets by $1.2 trillion over 10 years.
The CBO report also anticipates slow economic growth for the immediate future. “Under current law, federal tax and spending policies will impose substantial restraint on the economy in 2013, so CBO projects that economic growth will slow that year before picking up again, averaging 3.6 percent per year from 2013 through 2016.”
Due to slow economic growth, the CBO expects the unemployment rate to remain above 8 percent through 2012.
J. D. Foster, at The Heritage Foundation, a conservative think tank, noted, however, that the CBO's economic growth projections for 2011 may be too optimistic. The Bureau of Economic Analysis, within the Department of Commerce, estimated that economic growth was only 0.4 and 1.3 percent in the first and second quarters of this year. The economy would have to grow at 3.8 percent for the last half of the year to meet the CBO's expectations.
The New America Foundation's Committee for a Responsible Federal Budget (CRFB), a liberal think tank, agrees with the Heritage Foundation that the CBO's projections are based upon an overly-optimistic economic forecast and unrealistic assumptions about the actions of future congresses.
The CRFB concludes, therefore, that “the Super Committee should find savings in excess of its mandate by passing a package two to three times as large that includes fundamental reforms to the nation’s entitlement programs and tax system."
Daniel Mitchell, an economist at the Cato Institute, a libertarian think tank, also drew some conclusions from the report. Mitchell recalculated the CBO projections under the assumption that the Bush-era tax cuts would remain permanent. He determined that, under this assumption, the federal budget could be balanced by 2012 if spending growth were kept at 2 percent per year.
“In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians,” Mitchell argues.
The national debt is currently over $14.6 trillion with over $115 trillion in unfunded liabilities.
