CBO head: Government policies, debt may be slowing growth

Uncertainty about federal policies combined with the threat of long-term debt is likely slowing the nation's economic recovery, the head of the Congressional Budget Office said Thursday. 

Testifying before the the House Budget Committee, CBO Director Douglas Elmendorf said that "uncertainty about federal policy is diminishing household and business spending and that uncertainty covers a whole set of policies: It covers tax policy, it covers regulatory policy and it covers health policy." 

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"I should say the more important source of uncertainty is households and businesses uncertainty about their own incomes and demand for their products apart from government policy, and we think government policy is probably playing some role," he said a day after the CBO released a report that shows the nation's fiscal matters deteriorating more quickly and deeply than initially estimated. 

New figures released Wednesday by the CBO show debt rising to 190 percent of the gross domestic product by 2035. Economists have warned that exceeding 90 percent of gross domestic product (GDP) is a prescription for a debt crisis. 

"The current level of debt is reducing our output, our incomes relative to what would be the case if we had a lower level of debt, leaving aside the effects of this particular recession, which complicate that," Elmendorf said Thursday. 

"Over the longer period of this kind of analysis, higher levels of debt are more damaging." 

The annual long-term budget outlook forecasts a surge in public debt this year that will rise to 70 percent of GDP by the end of fiscal 2011, compared with 62 percent by the end of 2010, according to Wednesday's report. 

The CBO offered two forecasts, each showing fiscal deterioration in the next 25 years. 

The figures are much worse than those released by the CBO a year ago, and Elmendorf made it clear that the current budget framework won't make inroads to reducing the threat of increasingly damaging debt. 

"We have government programs that provide certain sorts of benefits to older Americans -- Social Security, Medicare and Medicaid," he told the panel. 

"We have a whole lot of other tasks for the government, national defense, homeland security, veterans care and on and on that have, over time, occupied a certain share of GDP. We cannot have all of those same things together in the future, we cannot repeat the past in the federal budget because of the aging of the population and rising healthcare costs."

Rep. Lloyd Doggett (D-Texas) responded that with "certainly we cannot but we can avoid, as you say, shifting a good deal of the burden and risk to seniors without addressing the broader issue of healthcare costs."

During a Wednesday hearing, Mark Zandi, the chief economist of Moody's Analytics said hiring won't pick up until the White House and Congress can find a way forward on the nation's debt and deficit issues.

"A revival in economic growth depends on a timely resolution of Washington’s debt-ceiling debate," he said during the hearing focusing on manufacturing. 

"It is hard to believe that Congress will not act to raise the debt ceiling over the next few weeks," he said. "A failure to do so would, at the very least, force budget cuts severe enough to push the economy into recession."

Yet on Thursday, negotiations over cutting the nation's burgeoning debt came to a surprising and sudden halt as House Majority Leader Eric Cantor (R-Va.), walked out on the talks over Democratic demands that revenue raisers -- tax increases -- be a part of the solution to avoid a default on the $14.3 trillion debt. 

“Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue," Cantor said. "Given this impasse, I will not be participating in today's meeting and I believe it is time for the president to speak clearly and resolve the tax issue." 

The group of congressional leaders along with Vice President Joseph Biden had met twice this week, so far, and a third meeting had been scheduled for Thursday until Cantor's abrupt departure from the talks. 

In that vein, Rep. Marlin Stutzman (R-Ind.) asked Elmendorf on Thursday if talk about raising taxes are keeping consumers and businesses money on the sidelines. 

That's when Elmendorf outlined a slew of issues plaguing the economy. 

In December, Congress passed a comprehensive package of tax cuts -- maintaining current income tax levels for all income groups through the end of 2012. 

Rep. Tim Huelskamp (R-Kansas) asked whether the best option to reduce the massive debt and deficit should be cutting spending saying that "under most economic assumptions it would seem that the only reasonable alternative to still grow economy and reduce debt is reducing spending now."

Elmendorf told the committee that there are trade-offs in raising marginal tax rates or cutting federal spending to reduce debt and deficits. 

"Higher marginal tax rates do reduce economic activity to some extent by views of most economists," he said. 

"But certain forms of government spending are important for economic growth and reducing those could be damaging to economic growth," he said. 

"There are pieces of federal spending that have been important in economic growth."

Huelskamp asked Elmendorf to identify programs that drive economic expansion and provide a list in the near future. 

Rep. John Yarmuth (D-Ky.) pressed Elmendorf on how the budget problems started and have grown into such a major problem. 

"There have been a collection of policy actions taken over the last decade that have significantly worsened the current budget picture," he told the panel.

"Also developments not predicted by CBO that have led to worsening of budget situation." 

Looking back at budget estimates from 10 years ago, he said, "the deterioration of budget outcomes for last four years -- 2008-2011 -- are due much more to legislative changes than to the economic and technical surprises and include a reduction in tax revenue and increases in spending."