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January 31, 2012

Our View: Federal budget needs work

The Free Press

— The Congressional Budget Office released its 10-year budget projection and economic outlook for the U.S. on Tuesday and guess what: We still need to work on the whole spending versus revenue thing.

The CBO is projecting a deficit of $1.1 trillion for fiscal year 2012 (which ends Sept. 30), down 2 percentage points as a percentage of GDP from last year’s $1.3 trillion deficit. While that sounds like some good news, CBO Director Douglas Elmendorf notes that the deficit is still the highest of any deficit between 1947 and 2008.

It’s important to know that while the deficit projections do make some assumptions about the economy and job growth, they are mostly projections based on current policies in place, especially the ones that affect taxing and spending.

The first important point to consider if we are at all in agreement on lowering the deficit: Current policies, including sunsetting of Bush and Obama tax cuts and mandatory spending cuts agreed to last year, would lower the deficit to roughly an annual level of about $200 billion, or just 1.5 percent of GDP from 2013 to 2022. The policies in place now would lower the deficit by about half, to $585 billion in 2013.

In other words, if Congress does nothing (something it’s getting good at), the deficit would be cut in half within a year or so.

Of course, given the political climate, achieving that reduction in the deficit so quickly will not likely happen because it would require that political leaders allow tax cuts to expire.

So one could, and should, look at the spending side as well.

Here the CBO has a good news, bad news scenario.

Overall federal spending is projected to declined as a share of GDP in the next few years but will rise after that.

The short-term decline is related to discretionary spending caps through the mandatory deficit reduction deal struck last year and stronger economic growth. However, the overall spending increases in later years are related to “mandatory” spending — programs like Social Security and Medicare that today’s political leaders and many before them have already approved. Those costs are going up because more people are eligible.

In an unusual action, the CBO also created an “alternative” budget scenario, taking into account the idea that political leaders will really not allow tax cuts to expire, and that they will really not cut spending that much and won’t likely cut things like doctor’s Medicare reimbursements by 27 percent — as is in current law.

In the “alternative” budget where CBO assumes we won’t let tax cuts expire or cut spending drastically, the deficit would be close to double the $585 billion projected for 2013 under existing policies.

The options are pretty clear if we’re serious about lowering the deficit. Cut spending not just by millions but by billions or keep spending at current levels and allow tax cuts to expire.

The longer we wait, the tougher these decisions will be.

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