The Congressional Budget Office on Wednesday offered a dismal outlook of the nation’s budget and economy, crystallizing the challenges Congress faces this fall in reducing deficits and increasing employment.
CBO projects a $1.28 trillion deficit for the fiscal year, and total deficits over the next 10 years of $3.5 trillion.
S&P’s decision jolted financial markets and raised new questions about the economy’s viability, particularly coming amid a series of other economic reports that suggested sluggish growth.
The debt-ceiling deal requires $2.1 trillion in cuts over 10 years, some of which Congress must still agree to make after a report due out of a newly formed supercommittee of lawmakers later this year. CBO projects another $1.2 trillion will be saved because of lower interest rates on debt payments.
Yet even with the debt-ceiling deal in place, the amount of national debt held by the public is forecast to grow from $10.2 trillion this year to $14.5 trillion by 2021, according to the CBO. Gross federal debt is expected to rise from $14.8 trillion this year to $21.3 trillion in 2021, CBO said.
Worse, the congressional budgetary scorekeepers also offered a gloomy forecast of the economy.
CBO now expects 2.3 percent economic growth in 2011 and 2.7 percent growth in 2012, compared to a January forecast of 3.1 percent growth for the year. And this projection does not take into account the downgrade of the nation’s credit rating by Standard & Poor’s or worsening economic data since early July.
Growth that minimal will make it difficult for the nation to reduce the 9.1 percent annual unemployment rate, and will also make it tougher to tackle budget deficits. Unemployment remains above 8 percent through 2014, CBO says.
“A great deal of the pain of this economic downturn still lies ahead of us,” CBO Director Doug Elmendorf said at a Wednesday press conference after the report’s release.
He said the debt-ceiling deal “makes a real difference, so I guess that’s good news.” He then added: “I think the challenges that remain are very large.”
To boost growth and cut the debt, politicians somehow must find ways to reconcile differences on whether tax increases and significant reforms to Social Security and Medicare are needed to address the long-term deficit while also deciding if temporary stimulus measures are needed to create jobs in the short term.
S&P downgraded the country to a AA+ credit rating largely because it lost confidence that U.S. policymakers are willing to make the changes necessary to get the U.S. on a better fiscal path.
After the release of the latest figures, however, neither Democrats nor Republicans showed any signs of backing away from their familiar positions.
Democrats are looking for higher taxes on the wealthy and short-term spending to boost the economy, while the GOP wants deeper cuts to spending, more tax cuts and a rollback of regulations that Republicans argue are limiting growth.
“This reports confirms again that years of reckless overspending have not produced the economic growth or the jobs that the president promised and that American families need,” House Budget Committee Chairman Paul Ryan (R-Wis.) said in a statement.
Rep. Chris Van Hollen (D-Md.), a member of the deficit supercommittee charged with finding at least $1.2 trillion in additional cuts, said the CBO report underscores the need for that panel to propose a plan that will to “help put America back to work.”
The CBO report gives ammunition to both sides.
House Speaker John Boehner (R-Ohio) argued Wednesday that the high unemployment figures show the 2009 stimulus championed by the White House, which had predicted a jobless rate of 6.3 percent by now, have failed.
CBO still projects explosive debt growth after 2012 because of the aging population and increased Medicare spending. This allows Ryan to argue that only the GOP has offered a solution to Medicare's problems.
Ryan has proposed converting it to a premium support plan, a proposal Democrats have ripped as ending Medicare as it is now known.
The report also says the waning of the stimulus package is a major reason for lower economic growth, and that spending cuts in the debt deal will also limit economic growth. This boosts arguments from Democrats that some short-term spending provisions should be approved.
Elmendorf said the CBO estimates a short-term stimulus would boost output and employment.
President Obama wants to extend the Bush tax rates only for families with annual income of less than $250,000. Republicans want the rates for wealthier households extended as well. Some congressional Democrats have floated a new threshold of $1 million for the extension of the tax rates.
Leaving all of the tax rates in place would add $2.5 trillion to the deficit.
If the supercommittee fails to agree to recommended cuts, or if Congress shoots them down, the existing deal would trigger huge cuts to discretionary and defense spending. Those cuts could also have an impact on economic growth.
CBO has much rosier forecasts for the middle of the decade, with growth reaching 5.3 percent by fiscal year 2015. This is a better forecast than the 3.7 percent growth CBO projected for 2015 in January.
But this forecast rests on several questionable assumptions.
CBO expects all of the Bush-era tax rates to expire in 2013, and forecasts a sharp reduction in Medicare payments to doctors, which Congress has never allowed to take effect.