CQ TODAY ONLINE NEWS
Jan. 31, 2012 – 10:51 p.m.
CBO Report Offers Two Tax Options
By Paul M. Krawzak, CQ Staff
Amid worsening economic projections, a new report from the Congressional Budget Office offers two alternative views of the government’s fiscal picture and presents lawmakers with a stark choice: allow taxes to rise and watch the deficit shrink, or hold the line on revenue, loosen spending restrictions and face mounting red ink.
Congress is unlikely to follow either fiscal path precisely. Still, the contrasting alternatives outlined in the CBO’s Budget and Economic Outlook released Tuesday offer a way for lawmakers to think about their fiscal options in the fourth consecutive year of $1 trillion-plus deficits.
Under CBO’s regular baseline projection, which assumes the expiration of tax cuts that were enacted in 2001 and 2003 and extended in 2010, the deficit would fall markedly over the next several years, to $196 billion in fiscal 2018 from $1.079 trillion in the current year. The deficit for fiscal 2011, which concluded last Sept. 30, was $1.296 trillion.
Under an alternative fiscal scenario, which anticipates continuation of the tax cuts and repeal of automatic spending cuts required by the August debt limit law (PL 112-25), the deficit would widen by trillions of dollars over a decade.
With the year’s budget debate now getting under way, lawmakers said CBO’s report underscored the need for both parties to get serious about the deficit.
“CBO’s latest alarm bell couldn’t be more ominous,” said House Budget Chairman
Senate Budget Chairman
But Conrad conceded that the prospects for success are uncertain. “I think we need a far more robust package and the priorities need to be revisited,” Conrad said, referring to his desire to replace the automatic cuts, or sequester, with other savings. “It’s hard in an election year. It’s hard anytime.”
CBO in recent years has presented alternative scenarios to reflect the political conflicts that lawmakers regularly face. Because of the way the agency has to calculate its regular baseline — including the assumption that tax cuts enacted for temporary periods will be allowed to expire — the alternative scenario has often been viewed by many budget experts as more realistic.
There is scant support in Congress, for example, for wholly ending the tax cuts on Dec. 31, as the regular baseline assumes.
The alternative scenario includes the equally unlikely assumption that Congress will repeal the automatic sequester. Although some lawmakers want to undo the sequester — particularly the portion that would cut military spending — their position is usually conditioned on finding other ways to trim the deficit.
CBO Report Offers Two Tax Options
CBO Director Douglas W. Elmendorf said Tuesday the sequester was added to the agency’s “menu” of laws that Congress might choose to repeal because of oft- stated opposition to it.
“We tried to lengthen the menu of alternatives that we show, because there are more and more different sorts of policies where people on the Hill will say, ‘Well, we won’t do that, or I don’t want this,’ ” Elmendorf said. He will testify to the House Budget Committee on Wednesday and Senate Budget on Thursday.
The two alternatives present very different results over the coming decade. CBO’s regular baseline would result in $3 trillion of accumulated deficits from 2013 through 2022. Under the alternative scenario, the cumulative deficit would swell to almost $11 trillion over that period.
When compared with the size of the overall U.S. economy, the baseline deficit would average 1.5 percent of gross domestic product annually, while the alternative would yield average deficits of 5.4 percent of GDP.
The agency said that even if tax cuts were allowed to expire and the sequester were permitted to go forward, the long-term budget outlook is problematic because of federal health care spending that is expanding faster than economic growth.
“Under both CBO’s baseline and its alternative fiscal scenario, the aging of the population and rising costs for health care will push spending for Social Security, Medicare, Medicaid and other federal health care programs considerably higher as a percentage of GDP,” the report said. The agency said federal debts will rise to “unsupportable levels” unless policymakers restrain spending, raise revenue above their historical share of GDP or decide on some combination of both.
CBO’s economic forecast anticipates inflation-adjusted GDP growth of 2 percent this year, slowing to 1.1 percent growth next year. The agency anticipates that the unemployment rate will average 8.8 percent this year and rise to 9.1 percent in 2013.
Those projections are less optimistic than CBO’s August forecast, in part because of “diminished near-term prospects for economic growth in other countries.”
Compared With Other Estimates
CBO’s economic outlook also runs counter to those of other forecasters, including the Federal Reserve and many corporate economists.
The Blue Chip consensus forecast of about 50 private economists and the forecast from Federal Reserve officials both project a rise in economic growth to almost 3 percent next year and a drop in the jobless rate to roughly 8 percent, or even lower.
CBO said the differences among the forecasts “probably stem from a variety of factors, including varying assumptions about the government’s future tax and spending policies.” CBO’s report said other forecasters may also assume that Congress will make changes to current laws.