The big headline number from Wednesday’s Congressional Budget Office report is a jolting shot of bad news: a budget deficit this fiscal year of close to $1.5 trillion, or 9.8 percent of gross domestic product (GDP).
That’s nearly as big as 2009’s shortfall, which was the highest in nearly 65 years. The $1.5 trillion deficit would be a nominal record, but not quite as big as the 2009 deficit when measured as a percentage of the economy.
More bad news: CBO’s forecasters don’t see employment returning to anything like normal before 2016.
Look inside the 190-page report and you’ll find facts, figures and forecasts that could help Republicans make their case that deficits and debt must be cut now. But you’ll also find other data that can aid President Barack Obama and Democrats in making their budgetary arguments — especially on the fiscal rationale for not repealing the health care law.
Wednesday’s report carries political weight. Even though congressional Republicans have heaped abuse on the CBO for reporting last year that the health care bill that Obama signed into law would reduce the deficit, CBO still remains the neutral, professional budget scorekeeper. It sets the terms of the debate.
Arguments for cutting spending and debt
For Republicans, the CBO report supplies powerful arguments for cutting spending and reducing debt.
The CBO’s new estimate of the deficit for 2011 is $414 billion larger than the one the office produced last August.
The new report uses the word “unsustainable” to describe deficits and debt in the years ahead.
It warns that interest rates — which it says are “very low by historical standards” right now — will go up and will drive up the cost of paying off the debt. Interest payments on the debt “are expected to skyrocket.” CBO projects that the government’s yearly net interest spending will more than triple between 2011 and 2021.
As if that weren’t frightening enough, the CBO warns in unusually stark language — as it has before — of the potential for a sovereign debt crisis. The report uses the words “Greece” and “Ireland” only once but it spells out a scary scenario in detail.
Risk of 'a sudden fiscal crisis'
The growing debt, it says, “would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.”
It warns that “as other countries’ experiences show, investors can lose confidence abruptly and interest rates on government debt can rise sharply and unexpectedly. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory. ... There is no way to predict with any confidence whether and when such a crisis might occur and no identifiable tipping point of debt relative to GDP.”
With that kind of risk being discussed by somber, nonpartisan numbers crunchers, Senate Republican Leader Mitch McConnell’s response to Obama’s State of the Union speech sounds more compelling. Obama’s call for a freeze on some types of federal spending falls way short, McConnell said.
“To freeze spending at this astronomically high level that we’ve achieved over the last two years really is totally inadequate.” McConnell said on MSNBC Wednesday morning.
Why taxes must go up
But then there’s data in the report that give Democrats ammunition for arguing that the tax increases that Obama called for Tuesday night on upper-income Americans must be part of any deficit solution.
“To keep annual deficits and total federal debt from becoming unsustainable, lawmakers will need to increase revenues as a percentage of GDP significantly above historical levels, sharply decrease projected spending, or pursue some combination of the two approaches,” the budget office said.
It’s not the CBO’s job to recommend what combination of spending cuts and tax increases would do the job — but it does imply that tax increases are inevitable.
Due to so many Americans not working, tax revenues have fallen. The government is forced to borrow partly because tax revenues are so low by historical standards. In 2011, for the third consecutive year, “revenues would be just under 15 percent of GDP; levels that low have not been seen since 1950,” the report says. Over the past 40 years, total revenues have averaged about 18 percent of GDP.
Democrats could use this to rebut Republican arguments that Americans “are not under-taxed.”
New revenue gained from health care law
And CBO reminds Congress that the health care law does have tax increases and new revenues in it: For example, $91 billion will be collected through 2021 from a new fee on health insurers set to begin in 2014.
And CBO does not back away from its estimate that the health care law, largely due to its cuts in future Medicare spending, will reduce future deficits.
But there’s a warning to both parties from CBO director Doug Elmendorf in his blog post on the report.
Deficits should shrink to about 3.6 percent of GDP, starting next year and for the next several years, he said. But that will occur only if Congress does three things which both Republicans and Democrats are reluctant to do:
- Allow the alternative minimum tax to bite more and more middle-class people. (Congress has repeatedly passed one-year AMT “patches” to keep the tax from affecting the middle class. It has a big impact especially on taxpayers in relatively high-income states with high state taxes, such as Maryland and New York.)
- Raise taxes on upper-income people by reverting to the pre-2001 income tax rates. (Obama and Congress agreed to a two-year postponement of this tax increase, but Obama renewed his call for the tax hike on Tuesday night.)
- Curb the annual increase in Medicare’s payment rates for physicians, to bring them into line with the inflation rate in the wider economy. Again, Congress has repeatedly passed temporary “doc fix” bills to shield doctors from these cost curbs.
If Congress can’t find the will to do those three things, Elmendorf said, deficits from 2012 through 2021 would average about 6 percent of GDP and debt would rise to a level not seen since right after the Japanese signed the instrument of surrender on the battleship Missouri.