CQ TODAY ONLINE NEWS – BUDGET
June 5, 2012 – 8:32 p.m.
CBO Says Continued Accumulation of Debt Will Weaken U.S. Economy
By Paul M. Krawzak, CQ Staff
A new report on the nation’s fiscal path underscores the negative impact that high deficits and growing debt will have on the economy if Congress does not make some tough choices.
The Congressional Budget Office on Tuesday warned that if Congress continues current policy by extending expiring tax cuts and putting off scheduled automatic spending cuts, the growth in red ink will harm the economy in years to come.
Both Democrats and Republicans pointed to various parts of the agency’s annual long-term budget projection as evidence backing up their positions, with the GOP saying that curbing rising spending is the answer, while Democrats said increased taxes have to be part of the solution.
During a House Budget Committee hearing on the report scheduled for Wednesday, Republican members of the panel plan to highlight the damage they say higher taxes would do to the economy. Democrats will argue that the GOP is holding up agreement on extending tax cuts for the middle class by its insistence on not raising taxes for affluent Americans.
CBO Director Douglas Elmendorf will testify at the hearing.
If Congress allows the tax cuts to expire and sequestration to take effect in January, the deficit will decline from its current 73 percent of gross domestic product to 60 percent in 2022.
But if Congress extends those tax cuts and cancels sequestration, federal debt held by the public would increase from its current 73 percent of GDP to 90 percent of GDP in 2022, 109 percent in 2006 and almost 200 percent in 2037.
The total debt including intragovernmental holdings, or money that federal entities owe to each other, is $15.7 trillion.
As a result of the growing debt, the gross national product would be 4 percent lower in 2027 and 13 percent lower in 2037, the agency said. CBO said large budget deficits and growing debt would weaken the economy by reducing national saving, leading to higher interest rates, more borrowing from abroad and less investment in the United States, in turn lowering the growth of income.
The suggestion of long-term economic impact had both parties digging deeper into their long-held positions.
“The explosive path of federal debt under the alternative scenario underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course,” CBO said.
Senate Budget Chairman
“If we don’t stop the projected explosion in federal debt, we will jeopardize the future economic security of the nation,” he added.
CBO Says Continued Accumulation of Debt Will Weaken U.S. Economy
House Budget Chairman
“Americans deserve better than the European-style austerity offered by the president’s broken promises and bankrupt policies,” he said. “Repeating Europe’s mistakes, the president’s policies call for job-crushing tax increases and harsh disruptions for beneficiaries of government programs as the debt spirals out of control.”
In the years since 2008, CBO said, debt held by the public has surged from 40 percent of GDP to more than 70 percent of GDP, the highest percentage since shortly after World War II. During those years, the country has coped with the steepest economic downturn it has faced since the Great Depression, triggering greater spending on programs for the poor and on programs aimed at restoring growth following a lengthy recession.
Former President Bill Clinton jumped into the fierce political debate over the debt and government policies on Tuesday, telling CNBC in an interview that Congress should simply extend the tax cuts into next year to put off a decision. Republicans jumped on the remarks and spread them around, saying the White House and Senate Democrats should take the advice.
But the CBO report said there are no answers for Congress that will come without the potential for pain in the short term and the long term.
Instead, the agency said Congress faces difficult trade-offs in deciding how quickly to implement deficit reduction policies. Cutting spending or increasing taxes slowly “would lead to a greater accumulation of government debt and might raise doubts about whether longer-term deficit reduction would ultimately take effect,” the report said.
But CBO added that “abruptly implementing spending cuts or tax increases would give families, businesses, and state and local governments little time to plan and adjust, and would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations.”
The more immediate result, the report said, would be “an added drag on the weak economic expansion.”