Congressional budget office: Fiscal policy is 'unsustainable'

“U.S. fiscal policy is unsustainable, and unsustainable to an extent that it can't be solved through minor changes,” Congressional Budget Office (CBO) Director Douglas Elmendorf told reporters at a Christian Science Monitor breakfast.

Spending on Medicare, Medicaid and Social Security, plus defense programs and debt interest, will exceed the rest of the federal budget in 10 years if most of the 2001 and 2003 tax cuts are extended, as President Barack Obama has proposed, Elmendorf said.

“It's a matter of arithmetic,” Elmendorf said of getting record deficits under control.

“Government would need to make changes in some set of the large programs, large parts of the tax code that we think of as the fundamental parts of the budget.”

Elmendorf's remarks come a day after Federal Reserve Chairman Ben Bernanke also called on policymakers to put in place a plan to reduce deficits.

“Unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth,” Bernanke said in a speech Wednesday.

The CBO projects that Obama's policies would produce deficits averaging nearly $1 trillion for the next decade.

The deficit would bottom out in 2014 at a level equal to 4.1 percent of gross domestic product, which is higher than the 3 percent level considered to be sustainable by the White House and independent economists. Deficits would again rise after 2014.

The debt-to-GDP ratio would go from 63 percent this year to 90 percent by 2020, the CBO said. A “select group of countries,” including Greece, which is facing a fiscal crisis, have debt levels that high, which is “worrisome,” Elmendorf said.  

Elmendorf cautioned against a fiscal retrenchment that is too quick and could hamper an economic recovery. The deficit levels are expected to drop from 10 percent this year to nearly 4 percent within four years, “the most rapid withdrawal of fiscal stimulus since the Second World War,” he said.

The ideal timing for deficit reductions would be “at some point beyond the next few years,” he said.