CBO says cutting waste not enough — cuts and/or tax hikes needed

The Congressional Budget Office on Monday said cutting waste from the budget is not enough to balance it, and that cutting programs, raising taxes or both will be needed. The CBO's observations came just before the Senate was to take up test votes on Tuesday on a Republican plan to cut $61 billion and a Democratic plan to cut $10 billion from FY 2010 levels.

"Fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency; the policy changes that are needed will significantly affect popular programs or people’s tax payments or both," CBO said in a presentation before the National Association for Business Economics.

While CBO did not suggest specific cuts in its presentation, it noted that the growth in budget outlays is due primarily due to increased healthcare and Social Security spending. CBO said spending on Social Security, Medicare and Medicaid and other health programs is expected to be 12 percent of U.S. GDP in 2021, about 50 percent higher than it was in 2007.

In that same period, defense, mandatory and non-defense discretionary spending will fall as a proportion of GDP.

CBO also highlighted the pros and cons of reducing deficits gradually. Reducing the deficit gradually would require more spending on interest payments, give policymakers less flexibility to respond to crises and increase "the likelihood of a fiscal crisis." But the advantages to a gradual reduction in the deficit include giving families, companies and states more time to adjust, minimizing the effects of spending cuts on economic growth and "possibly" help older generations.

CBO added that even if the U.S. economy returns to normal growth patters, "the gap between spending and revenues is likely to remain very large."