CBO paints a precarious fiscal future
The Congressional Budget Office (CBO) released the Long-Term Budget Outlook yesterday that has no doubt raised some eyebrows on the Hill as well as among Americans concerned about our fiscal future. To say the paints a pessimistic view of our long-term budget issues is an understatement:
The Congressional Budget Office on Tuesday painted a stark picture of the country’s fiscal future, which will be determined in part by tough choices lawmakers face in the coming months on the federal budget.
The CBO, the nonpartisan official beancounter in Washington, painted two scenarios for Congress.
The first assumes laws currently in place rule the day. That means lawmakers do nothing to lessen the effects of the so-called fiscal cliff and allow $7 trillion in tax hikes and spending cuts start to take effect in January.
Under that scenario over the long run, debt falls to 53% of the size of the economy by 2037 from more than 70% today. Tax revenue would rise to 24% of GDP in 25 years and keep growing. That would be well above the 18.3% historical average
Then there’s the second scenario analyzed by CBO — the one many consider to be a more realistic outlook.
In that scenario, Congress largely leaves many of today’s policies in place. Among them: The Bush tax cuts. Protection for the middle class against the Alternative Minimum Tax. A rollback of scheduled payment cuts for Medicare doctors.
The agency also assumes lawmakers cancel the nearly $1 trillion in spending cuts set to take effect next year.
A stunner from the Congressional Budget Office in its new long-term budget forecast. When the government budget scorekeepers took into account the worst-case scenario impact of debt on the U.S. economy, its economic forecasting model, well, broke:
Under the assumptions leading to the most negative effect on GNP, debt would reach 250 percent of GDP by 2035. CBO’s model cannot reliably estimate GNP after debt reaches that amount, in the agency’s judgment: The assumptions about private saving and capital inflows incorporated in CBO’s model are based on historical experience, and if interest rates and the debt-to-GDP ratio rose to levels well outside of that experience, those assumptions might no longer be valid. In 2035, GNP would be 21 percent below the benchmark under the assumptions leading to the most negative effect on GNP; beyond 2035, the negative effect on GNP would grow under those assumptions as debt continued to increase relative to the size of the economy.
The above chart shows the U.S. economy in a long recession starting in the early 2020s and then just … stopping. There be dragons!
Debt is so high, a massive 250% of GDP, that the CBO can no longer calculate its harmful impact on the economy, though one can assume the direction is down.
Some of you are probably saying, “See, we need the tax hikes to deal with the debt.” But what is posted above doesn’t paint the entire picture presented by the CBO. According to the report, the tax hikes scheduled to take place would have a negative effect (page 43):
[T]o the extent that additional tax revenues were generated by boosting marginal tax rates, those higher rates would discourage people from working and saving, further reducing output and income.
We’re in a tough spot, for sure. We have Republicans that don’t want to make any cuts to defense spending and are offering milquetoast reforms to entitlements, proposals from Sen. Rand Paul and a few others notwithstanding. Democrats don’t want to do anything to reform entitlements, nor do they want to cut non-defense discretionary spending. Meanwhile, the tax cuts that will hit in January — otherwise known as Taxmageddon, are going to contract the economy. And what’s worse is we don’t have much time to close the gap before countries stop lending to us because we can’t cover the deficits and debt we’re currently running up!
You’ve heard this, time and time again, but it’s worth repeating — we do not have a revenue problem; we have a spending problem. And there are many in Washington willing to make the cuts necessary to ensure that we have a functioning economic that can grow and allow Americans to prosper.