...That is, if Congress does nothing. Under current law, a bevy of tax breaks, such as the temporary payroll tax cut, will expire in coming months and years, along with the extension in unemployment benefits. Meanwhile, cuts in Medicare physician payments will go into effect. A new report from the non-partisan outfit shows that the near-term outcome of these policies would be mixed: a substantial slowdown in debt growth, alongside a sharp reduction in GDP growth and employment from current rates and projections.
Under current law, annual deficits will drop sharply in coming years, from 7 percent of GDP in fiscal year 2012 to 1.4 percent in 2022. The government's outstanding debt would also decrease as a share of GDP, from 72.5 percent in 2012 to 62 percent in 2022.
At a press conference today, CBO Director Doug Elmendorf stressed that the projections are purely based on current law, and are therefore not the same thing as forecasts. In contrast to the CBO projections, Federal Reserve forecasts released last week predict unemployment trending between 7.4 and 8.1 percent next year.
If increased revenues and major cuts to Medicare spending would be painful near-term, what are the other options? To provide an alternative scenario, the CBO looked at what would change if many of the 2010 tax cuts—including the Bush tax cuts, but not the payroll tax cut currently being deliberated in Congress—were extended, if Medicare physician payments were cut by 27 percent (as is scheduled in March 1), and if the recent Budget Control Act's automatic limitations on spending did not go into effect.
With that additional spending and reduced revenue, GDP and employment growth would pick up in 2013. However, in 2022, unemployment would be at 5.3 percent—the same as projected under current law—and GDP growth would be just above 2 percent, one to two tenths of a percent lower than otherwise projected. Debt would also reach 94 percent of GDP by 2022.
In particular, Elmendorf emphasized that entitlements exhibit some of the greatest spiraling costs and are ripe for reform. "The fundamental fiscal challenge for this decade and beyond remains the aging population and rising costs for healthcare," he said , noting that the number of people age 65 or older will increase by one-third in the next 10 years. Spending on Medicare and Social Security together are expected to grow from 8.6 percent of GDP in 2012 to 9.7 percent of GDP in 2022, compared to a drop from 4.4 to 3.4 for other mandatory spending, excluding Medicaid.
While the CBO is nonpartisan and does not tend to get entangled in policy debates, Elmendorf today stressed the need for congressional action: "The longer that we wait as a country to make the sort of choices we have to make, the harder it will be to make them, because more debt will have accumulated."
The ultimate lesson seems to be a milder version of the current drama playing out in Europe—an illustration that austerity and profligate government spending are both double-edged swords.
According to Elmendorf, the best policy option is change that is both massive and slow. "One can both provide near-term support and put the economy on a sustainable medium-term and long-term path. ... To do that requires that fiscal restraint take effect slowly but amount to a very large change from current policies."
So far, there is little evidence that the current Congress will be able to rise to such a challenge.