Congressional Budget Office warns of continuing federal deficit challenges

By Agri-Pulse Staff

© Copyright Agri-Pulse Communications, Inc.

Washington, Aug. 19 – In its “Annual Summer Update of the Budget and Economic Outlook” released Thursday, the non-partisan Congressional Budget Office (CBO) forecasts that “the recovery from the economic downturn will continue at a modest pace during the next few years.” CBO expects relatively large deficits to continue due to “a combination of weak revenues and elevated spending associated with the economic downturn and the policies implemented in response to it.”

The CBO report notes that its projections are based on expiring stimulus efforts expiring on schedule and current trends continuing. Because it assumes that “current laws affecting the budget will remain unchanged,” CBO offers its projections “as a neutral benchmark that lawmakers can use to assess the potential effects of policy decisions.”

Among the report's key findings for the 2010–2020 period:

  • “the federal budget deficit for 2010 will exceed $1.3 trillion – $71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010.”

  • “this year’s deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year’s deficit of 9.9 percent of GDP.”

  • If expiring stimulus programs are allowed to expire as planned, “the federal budget deficit would decline substantially over the next two years – to 4.2 percent of GDP in 2012 – and, consequently, the budget would provide much less support to the economy than has been the case for the past two years.”

  • “The considerable number of vacant houses and underused factories and offices will be a continuing drag on residential construction and business investment, and slow income growth as well as lost wealth will restrain consumer spending.”

  • “CBO projects that the economy will grow by only 2.0 percent from the fourth quarter of 2010 to the fourth quarter of 2011; even with faster growth in subsequent years, the unemployment rate will not fall to around 5 percent until 2014.”

  • “Projected deficits total $6.2 trillion for the 10 years starting in 2011, raising federal debt held by the public to more than 69 percent by 2020, almost double the 36 percent of GDP observed at the end of 2007.”

The report warns that its projections “may significantly underestimate actual deficits” and that “many other outcomes are possible” based on how Congress decides to tackle both taxes and discretionary spending. If Congress decides to continue current stimulus efforts rather than allow them to expire, “the deficit in 2020 would equal about 8 percent of GDP, and debt held by the public would total nearly 100 percent of GDP.”

CBO's good news is that fiscal policy changes could boost real GDP growth in 2011 0.6 to 1.7 percentage points higher than CBO's baseline forecast, pushing unemployment at the end of 2011 0.3 to 0.8 percentage points lower than forecast. But the longer-term warning is that “the nation will face daunting long-term fiscal challenges posed by rising costs for health care and the aging of the population. Continued large deficits and the resulting increases in federal debt over time would reduce long-term economic growth.”

The CBO report concludes that “Putting the nation on a sustainable fiscal course will require policymakers to restrain the growth of spending substantially, raise revenues significantly above their average percentage of GDP of the past 40 years, or adopt some combination of those approaches.”

To read the CBO's complete seven-page “Annual Summer Update of the Budget and Economic Outlook” with charts, go to:

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