CBO Report Offers Choice: Tighten Belt, or Buy a Bigger One

Congressional Budget Office offers tough choices for the nation on spending and taxes.

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CBO figures show just how much the government may need to tighten its belt (answer: a lot).

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Today the Congressional Budget Office released its 2012 long-term budget outlook, projecting two very different fiscal paths for the country. One scenario projects how deficits and debt will look in coming decades if current law, including the automatic spending reductions and expiration of tax cuts, known as the "fiscal cliff" or "taxmageddon," continues unchanged. In this scenario, debt held by the public would drop from roughly 73 percent of economic output this year to 62 percent in 10 years, then to 53 percent in 25 years.

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On the other hand, if current tax cuts and spending levels are extended, and if lawmakers also enact other changes, like preventing Medicare's physician payment rates from declining, debt would grow rapidly, to 90 percent of GDP in 2022, and skyrocketing to 200 percent in 2037.

It's not an easy choice: either cut government spending and raise revenues—thereby hurting short-term growth but staving off massive debt—or maintain the status quo—thereby avoiding the near-term effects of spending cuts but inviting a future fiscal crisis.

It's also the same tough choice that millions of Americans face on an individual basis, says one scholar.

"That kind of stuff of stimulus spending helps growth only in the short term. ... That's the equivalent of having a cup of coffee in the morning to get you going," says Andrew Biggs, resident scholar at the right-leaning American Enterprise Institute, of government transfers boosting the economy. He says the federal government should consider reforming entitlement programs to cut spending. "Saving more and working more—that's the equivalent of going to the gym every day and working out. ... What spurs short-term growth is often the opposite of what spurs long-term growth," he says.

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In short, cutting some government payments may hurt individual spending, but it will put the nation on a better path altogether, he says.

From that perspective, the choice looks simple, even if achieving it is tough: Long-term fiscal health sounds attractive in the abstract, as does being trim and eating lots of celery.

Then again, extending Biggs' analogy, some European countries like Greece and Spain seem to be at the other end of the spectrum, growing woozy from a crash diet of austerity. That's enough to make some Americans wary of enacting large spending cuts or allowing tax rates to rise.

Indeed, while the CBO warns of the threats posed by rising debt, like high interest payments and a loss of investor confidence, it has also acknowledged the problems posed by the fiscal cliff. According to an analysis released in late May, the CBO projected that under current law, GDP would contract by 1.3 percent in the first half of next year, then would grow by 2.3 percent in the second half.

Of course, as Biggs points out, it is unrealistic that lawmakers will simply allow current law to remain unchanged. But as neither scenario forecasts a comfortable path forward for the economy, it may be necessary for lawmakers to consider a path somewhere between drinking gallons of coffee and living at the gym.

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"What we need to do is not allow all of the current law constraints...to occur suddenly next year, but instead take some steps that might increase deficits over the next year or so, to give the economy a boost in the short run," says James Horney, vice president for federal fiscal policy at the left-leaning Center on Budget and Policy Priorities. After that, he says, it may be a better time for a cutback in spending and a rise in taxes.

Though a new outlook is released every year, the reality of high future debt levels is nothing new, as the country foresaw long ago factors feeding that debt, like a rapidly aging population.

"This is not any news to anybody," says Horney. "It reiterates what everybody who's been looking at long-term budget path has known for a number of years, decades really: that if we continue current policies, we're on an unsustainable path."