Just before Thanksgiving, I was the opening speaker at the fall symposium of the AABPA. My presentation on "The Economic and Budget Outlook" drew on our August report The Budget and Economic Outlook: An Update, our June report The Long-Term Budget Outlook, and the most recent Treasury budget data for fiscal year 2009. (CBO is currently in the process of updating its economic forecast and budget projections for release in the next Budget and Economic Outlook in late January.)
My comments emphasized three points:
- Like most other analysts, we anticipate a relatively slow and tentative economic recovery. The unemployment rate is likely to rise above its current reading of 10 percent in coming months; the percentage of unemployed people who have experienced a permanent layoff is now around 55 percent, well above the peak values in previous recessions; and the percentage of unemployed people who are finding jobs has plummeted. In August, we expected that creating new jobs to replace the millions lost in this recession would take a number of years, and that the unemployment rate would not be back at its sustainable long-run level until 2014. Unfortunately, much more of the pain of unemployment from this recession lies ahead of us than behind us.
- As GDP strengthens and spending related to the economic stimulus package abates, the federal budget deficit will shrink from the nearly 10 percent of GDP recorded in fiscal year 2009. In August, CBO projected that, under current law, the deficit would remain close to 10 percent of GDP in fiscal year 2010 but would fall below 4 percent of GDP in fiscal year 2012.
- Over the medium term and longer term, the federal fiscal situation remains grim. As I have said on several occasions: Current budget policy as perceived by many people (in particular, the personal income tax rates now in effect) would generate much larger deficits than current law as captured in CBO's baseline. In addition, federal debt is already very large relative to GDP by historical standards. Moreover, the aging of the population and rising health care spending will continue to push up federal spending.