I testified about CBO’s Budget and Economic Outlook to the House Budget Committee yesterday morning and to the Senate Budget Committee this morning. In both testimonies I highlighted several points from the Outlook:
- Under current law, CBO projects that the budget deficit this year, will be about $1.3 trillion, or more than 9 percent of the country’s total output. Looking beyond this year, the budget outlook is daunting: Under current law, CBO projects that the deficit will drop to about 3 percent of GDP by 2013 but remain in that neighborhood through 2020. By that point, interest payments alone would cost more than $700 billion per year.
- Maintaining the policies embodied in current law that underlie these projections would not be easy. It would mean, for example, allowing all the tax cuts enacted in 2001 and 2003 to expire in 2011 as scheduled and not extending the temporary changes that have kept the alternative minimum tax, or AMT, from affecting more taxpayers. If, instead, policymakers extended all of the 2001 and 2003 tax cuts, indexed the AMT for inflation, and made no other changes to revenues or spending, the deficit in 2020 would be twice the size of the deficit projected under current law. Debt held by the public would equal 87 percent of GDP and be rising rapidly. As another example, the baseline projections assume that annual appropriations will rise only with inflation. If, instead, policymakers increased such spending in line with GDP—which is about what actually happened over the past 20 years (leaving aside the stimulus package)—the deficit in 2020 would be two-thirds again as large as projected under current law.
- Forecasts of budget and economic outcomes are highly uncertain. Actual deficits could be significantly smaller than we project—or significantly larger. We believe that our projection balances those risks.
- One set of factors contributing to the bleak budget outlook are the financial crisis and severe recession, along with the policies implemented in response. Unfortunately, CBO expects that the pace of economic recovery in the next few years will be slow. Households’ spending is likely to be dampened by weak income growth, lost wealth, and constraints on their ability to borrow. Investment spending will be slowed by the large number of vacant homes and offices. In addition, although aggressive action by the Federal Reserve and the fiscal stimulus package helped moderate the severity of the recession and shorten its duration, the support to the economy from those sources is expected to wane.
- CBO expects that it will take considerable time for everyone looking for work to find jobs, and we project that the unemployment rate will not return to its long-run sustainable level of 5 percent until 2014. Thus, more of the pain of unemployment from this downturn probably lies ahead of us than behind us.
- A large and persistent imbalance between federal spending and revenues is apparent in CBO’s projections for the next 10 years and will be exacerbated in coming decades by the aging of the population and the rising costs of health care. That imbalance stems from policy choices made over many years. As a result of those choices, U.S. fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering. The country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the nation is to avoid serious long-term damage to the economy and to the well-being of the population.