Report: Major policy changes needed to get deficit under control

Leading lawmakers and analysts predict short-term improvement in the federal budget but forecast a sustained growth of debt. 

The ratio of the deficit to gross domestic product is expected to ease through 2014 -- declining from about 10 percent of GDP to 2.3 percent -- but costs spiral out of control after that, a new report released Friday by the Tax Policy Center predicted. 

Without major changes in budget policy, deficits are expected to climb to nearly 7 percent of GDP by 2020, more than twice the Congressional Budget Office's forecast, according to Bill Gale, co-director at the TPC and Alan Auerbach, an economics professor at the University of California at Berkeley. 

At this rate, within the next 10 years, the federal debt to GDP ratio is expected to hit 90 percent of GDP.

Under Gale's and Auerbach's assumptions, more than $11 trillion in additional deficits will stack up through the end of the decade leading to a permanent budget gap of 9 percent of GDP. 

President Barack Obama's budget shows an additional $9 trillion in deficits. 

The Senate Budget Committee approved a budget resolution that would reduce deficits to $545 billion or 3 percent of GDP by 2015. 

Time is running out on the House to move forward on its budget blueprint. House Budget Chairman John Spratt (D-S.C.) has expressed a desire to mark up their version but are waiting for the leadership to give the go-ahead. The appropriations committee would aim to push through all 12 bills before the August recess and possibly send them to the floor before the Oct. 1 start of fiscal 2011. 

To arrive at their conclusions, Gale and Auerbach used CBO's budget baseline, assuming current law -- such as the Bush tax cuts expire at the end of 2010 and middle-class households getting hit by the alternative minimum tax. Then adjust that to reflect an extension of tax cuts, relief for the AMT and dividend and capital gains rates remain at 15 percent. 

On the spending side, the Medicare physician payment rates remain frozen at current levels but not cut, defense spending falls modestly and non-defense discretionary spending -- everything except entitlements -- are adjusted for inflation and population growth. 

Congress will probably allow the tax cuts expire for Americans making more than $200,000 a year and Medicare docs will get a raise. 

If current policy doesn't change, the report finds that revenues will remain at about 18 percent of GDP. Spending is about 23 percent of GDP right now but is expected to drop to 20 percent during the next few years before soaring again, possible up to 26 percent by 2050.