Budget Deficit Falling But Looming Costs Hurt Overall Picture

The national economy will see some improvement in the coming years but the back half of the decade will be characterized by a looming debt burden and growing federal deficit under current economic policy, a new outlook report from the Congressional Budget Office says.
by | February 6, 2013

The national economy will see some improvement in the coming years but the back half of the decade will be characterized by a looming debt burden and growing federal deficit under current economic policy, a new outlook report from the Congressional Budget Office says.

“We have a large budget imbalance,” CBO Director Douglas Elmendorf said at a briefing on the report released Tuesday. “We have large projected deficits, debt that will remain at a historically high share of [Gross Domestic Product] and will be rising at the end of the decade. What that implies is that small changes to the budget policy will not be sufficient to put the budget on a sustainable path.”

The report is the office’s revised outlook after lawmakers reached a deal on the fiscal cliff last month and includes a higher projected deficit by 2023. And, Elmendorf cautioned, three upcoming policy decisions could dramatically affect the picture: 1) automatic spending reductions that are set to kick in early March, 2) a Continuing Resolution that expires at the end of March and 3) a mid-May deadline on raising the federal government’s debt limit.

If lawmakers seek to change policy in a way that delays cuts or extends tax breaks, “as they have been prone to in the past,” the projected debt burden of $26 trillion in 2023 could be larger, he said. The sooner decisions are made, Elmendorf added, the more time state and local governments will have time to adjust to the new economy.

The burden won’t be felt immediately. In fact, the national economy will see moderate improvement this year of 1.4 percent with stronger growth projected in the coming years of greater than 3 percent.

After this year the CBO predicts the unemployment rate will improve as economic growth speeds up. Still, the rate is expected to remain above 7.5 percent, meaning 2014 will mark the sixth consecutive year at or above that rate, the longest such period since World War II.

Federal revenues are expected to increase by roughly 25 percent between this year and 2015, mainly as a result of the growing economy as it continues to recover from the recession and from recent policy changes (such as the income tax increase on higher earners).

The amount of federal spending as a share of the size of the economy is also projected to decrease in the coming years, falling to 21.5 percent by 2017. While that is still above the 40-year average of 21 percent, it’s well below the 2009 peak of 25.2 percent of GDP, the report said.

But the latter half of the decade will tell a different story. While the national budget deficit is expected to make strides in the immediate years, shrinking to $430 billion or 2.4 percent of GDP by 2015, that progress is temporary. The CBO predicts increased pressures from an aging population, rising healthcare costs and growing interest payments on federal debt will by the end of the decade erase any steps made toward shrinking the deficit. By 2023, the deficit is projected to total $978 billion, or 3.3 percent of GDP.

As a result, the country’s public debt is expected to hit 76 percent of the GDP this year, the highest percentage since 1950, and is projected to hit 77 percent by 2023. Such a large debt could increase the likelihood of a financial crisis, “during which investors would lose confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates,” the report said.

Additionally, the CBO warns that if spending cuts scheduled to take place in Medicaid aid are eliminated and extended tax provisions set to expire at the end of the year, the public debt could rise to as much as 87 percent of GDP by 2023.

Any movement in that upward direction could have disastrous consequences for the nation’s economy.

“If we were running along at 76 or 77 percent GDP and encountered another financial crisis we’d have very little room to move,” Elmendorf said.

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