The federal government will complete the year with a $1.3 trillion budget deficit, a near-record level comparable to 8.5 percent of the entire national economy, according to a Congressional Budget Office mid-year outlook released Wednesday. For the third year in a row, the deficit will total well above the trillion-dollar mark, fueled by the financial crisis, a painfully slow economic recovery and massive government spending. The CBO report also predicted that unemployment will remain stubbornly high well beyond election year 2012.
Despite the dismal picture of gushing red ink, CBO projects that the deficit will drop next year to $973 billion, and will continue to decline throughout the coming decade, to a mere $279 billion by 2021. Taken together, the projected deficits over the next 10 years will total $3.5 trillion, a figure considerably lower than the $6.7 trillion cumulative figure that the congressional budget agency projected only six months ago.
Most of that reduction stems from the anticipated effects of the Budget Control Act signed by President Obama earlier this month, which sets caps on future discretionary spending and created a process for adopting additional deficit reduction measures. But that rosy forecast assumes that current law will not change and that Congress and President Obama will allow major temporary tax cuts and spending initiatives to expire over the next two years – a bad bet to make in a crucial election season, when neither party will want to be blamed for raising taxes. Those laws include the 2001 across-the-board income tax cut pushed through by President George W. Bush; a measure aimed at softening the impact of the alternative minimum tax; the payroll tax reduction now in effect; and repeated postponements of cuts in Medicare payment rates to doctors.
If those measures are extended, as they have been on previous occasions, deficits would rise – relative to the CBO’s baseline projections for 2012 to 2021 – by nearly $5 trillion. The result: cumulative deficits totaling a staggering $8.5 trillion over the coming decades, instead of the $3.5 trillion now being projected by CBO. That would mean that the average federal deficits from 2012 to 2021 would account for 4.3 percent of GDP, compared with the 1.8 percent currently contemplated by the CBO.
‘Economy Remains Mired in an Extreme Slump’
As part of the latest agency forecasts, CBO Director Douglas W. Elmendorf offered a fresh dose of sobering economic news: The economic recovery will continue to limp along for at least the next few years and the current 9.1 percent unemployment rate will drop a little, but then hover well above 8 percent through 2014.
Elmendorf said that in the wake of the worst economic crisis in modern times, it will take considerable time for households to rebuild their wealth and pay down their debts, for financial institutions to restore their capital bases and the supply of credit, for businesses to regain the confidence necessary to invest in new facilities and capital, and for the sorely depressed housing market to make a comeback.
The recent turmoil and wild swings in the international financial markets also threaten to prolong the slump, he added, while states are beginning to feeling the adverse effects of an end to the federal stimulus programs – which CBO said helped to lower the unemployment rate and spur economic growth. Finally, depending on how Congress and the President ultimately agree to achieve trillions of dollars in long-term savings this fall, short-term spending cuts could well add to the economic woes of the country.
“A great deal of this economic downturn still lies ahead of us,” Elmendorf told reporters during a press briefing at CBO headquarters, as he surveyed the grim economic and fiscal landscape. “The economy remains mired in an extreme slump.”
Not Much of a Surprise, Really
For a nation inured to a steady stream of bad economic news, there was little in the CBO’s latest outlook that comes as a surprise or that is wildly at variance with other government and private forecasts: On the basis of economic data available through early July, CBO projects that real Gross Domestic Product will increase by 2.3 percent this year and by 2.7 percent next year. Under current law, federal tax and spending policies will impose substantial restraint on the economy in 2013, leading the non-partisan congressional agency to project that economic growth will slow that year before picking up again – averaging 3.6 percent per year from 2013 through 2016.
With only modest economic growth anticipated for the next few years, CBO anticipates employment to expand slowly. The unemployment rate is projected to fall from 9.1 percent in the second quarter of 2011 to 8.9 percent in the fourth quarter of the year and to 8.5 percent in the fourth quarter of 2012. Unemployment will stay at that level, above 8 percent, through 2014.
Although inflation increased in the first half of 2011, spurred by a sharp rise in oil prices, CBO is predicting that it will diminish in the second half of the year and then stay below 2 percent over the next several years. Even with a decline in oil prices, CBO expects the pace of growth to be restrained for several more years by the lingering effects of overbuilding, the financial crisis and the lingering recession.
Taking all of those factors into account, CBO projects that real GDP will increase at a modest pace, on average, through 2013 – driven by continued strength in business investment, modest increases in consumer spending and expansion in net exports and residential investment.
The report cautions that beyond CBO’s 10-year projection window, there will almost certainly be substantial increases in federal debt relative to the nation’s output without significant changes in budget and fiscal policy – especially entitlement programs such as Medicare and Social Security. The aging of the population and rising health care costs will push federal spending up to unsustainable levels.
“The United States continues to face profound budgetary and economic challenges,” Elmendorf said.
Sen. Rob Portman, R-Ohio, a member of the new congressional Super Committee charged with identifying $1.5 trillion or more of spending savings this fall, said the CBO analysis confirms the major shortcomings of the Obama administration’s economic policies and that “the U.S. economy continues to struggle.”
“Under the Obama Administration, we’ve seen more government growth and regulation, which stifles innovation and puts American employers at a disadvantage when trying to compete globally,” Portman said in a statement. “The CBO report, which increased the projected unemployment rate for 2012 through 2015, is another indicator Washington needs to enact pro-growth policies, such as those in the Senate Republican Jobs Plan, that will spur job creation and strengthen the economy.
House Budget Committee Chairman Paul Ryan (R-Wis.) called the latest CBO report a warning “of the urgent need to get Washington’s fiscal house in order,” adding, “This report 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.”
Rep. Chris Van Hollen (Md.), the top Democrat on the House Budget Committee and another member of the Super Committee, said the report highlights the need for lawmakers to come up with job-creation measures while working to reduce the long-term deficit.“I look forward to working with my colleagues to develop a plan focused on boosting economic growth now and cutting the long-term deficit in a balanced way that addresses both the expenditure and revenue side of the budget equation,” he said.