CBO: America on Unsustainable Fiscal Path

The Congressional Budget Office forecasts a slow economic recovery and staggering high debt growth in the years ahead.

The Congressional Budget Office (CBO) released its annual Budget and Economic Outlook this week. While the prospects for recovery are looking up, it will probably take many years for the United States to return to pre-recession growth rates.

The CBO expects that production and employment will expand in the years ahead, if at a moderate pace. The number crunchers foresee 3 percent growth for the years 2011 and 2012, reflecting continued strong growth in business investment, improvements in both residential investment and net exports and modest increases in consumer spending.

Unemployment will nevertheless remain high for several more years. By the end of this year, the CBO expects the joblessness rate to remain at a dismal 9.2 percent. Only by 2016 would it reach its “natural” rate of 5.3 percent.

In short, the CBO sees no reason to assume that the American economy will recover any time soon. But once it does, the government has still to enact significant changes in either tax structure or spending policy or both to restore fiscal balance.

The federal deficit is set to account for close to $1.5 trillion this year, or almost 10 percent of GDP. As a result, the national debt will grow to 70 percent of GDP by the end of this fiscal year — an increase from 40 percent of GDP at the end of 2008. If no serious spending reductions are made, the debt could reach 77 percent of GDP by 2021.

And that’s the optimistic scenario. If the Bush era tax cuts are perpetuated beyond the end of 2012 and Medicare payments rates for physicians’ services are held constant rather than allowed to drop sharply as anticipated under current law, deficits would average 6 percent of GDP between 2012 and 2021. The national debt, as a result, would rise to almost 100 percent of GDP by 2021. Not since the end of World War II have the United States been so heavily in debt.

It will get even worse from there on out. Already, an entitlement crisis in looming in America. Over the next 25 years, government spending on mandatory health-care programs, including Medicare, Medicaid and insurance subsidies, along with Social Security benefits will increase from roughly 10 percent of GDP this year to about 16 percent.

Already, the three largest of entitlement programs account for a third of federal spending. They will likely swallow up half of the budget by the end of this decade.

President Barack Obama admitted that the country was on an unsustainable fiscal path in his State of the Union address but other than banning congressional earmarks and eliminating tax loopholes, he had few solutions to end high deficit spending. Instead, the president called for increased investment in education and innovation to enhance American competitiveness.

The president also favored a five year freeze in discretionary spending but this would hardly (or not at all) affect entitlements and defense.

Ahead of November’s midterm elections for Congress, Republicans pledged to rein in spending, somehow but they volunteered few specifics. The opposition intends to cut $100 billion in discretionary spending this fiscal year and return federal expenditures to 2008 levels but independent observers wonder whether they could without making painful budget cuts.

The National Commission on Fiscal Responsibility and Reform which was formed by President Obama in January of the last year proposed deep budget cuts two months ago, including a freeze in government salaries, reductions in farm subsidies and an elimination of earmarks. Entitlements were not exempt from the commission’s recommendations although proposed reforms fell short of actually balancing the books on these programs. Obamacare, which will only increase health-care spending after 2020, was not mentioned in the commission’s report at all.

Raising the retirement age and asking doctors if not insurers to share in the burden of mounting health-care costs, as the commission prescribed, will not make entitlements affordable unless their scope is reduced or taxes are raised. Democrats are adamantly opposed to entitlement reform however and the president has pledged to preserve Social Security “forever.” Republicans by contrast are likely to block any tax hike.