Report: After a decline, budget deficit will start growing again

Kevin G. Hall,William Douglas

The federal budget deficit should shrink to 2 percent of the total economy by 2015, the nonpartisan Congressional Budget Office said Tuesday in a new forecast of long-term trends.

The debt held by the public would fall as a share of the economy to a healthier – but still high – 68 percent not long afterward.

The improving deficit and debt numbers are due to cuts in government spending and an improving economy, and they reflect short-term trends, the CBO said. Over a longer window, through 2038, the nation’s finances remain on perilous ground, the CBO said.

That’s because the CBO assumes that changes to the tax code agreed to last January raised taxes on just 1 percent of taxpayers and locked in permanent cuts for everyone else that weren’t accompanied by reductions in spending that were anywhere near the same size.

Additionally, an aging nation means that in coming decades the strains on Medicare and Social Security, absent changes to their funding mechanisms, are likely to swamp the federal budget.

Over the long term, the CBO said, “budget deficits would rise steadily and by 2038 would push federal debt held by the public close to the percentage of GDP (gross domestic product) seen just after World War II.”

"To be sure, the deficit has shrunk dramatically in the past few years," Douglas Elmendorf, the head of the CBO, said during a briefing on the report. "After that respite, however, we project that deficits would start growing again."

The CBO report makes it clear that the long-term outlook hasn’t improved, and is arguably worse.

Debt as a percentage of the economy has historically been around 38 percent, and it’s about 73 percent right now. It would decrease to 68 percent in 2018 before starting to rise again. “CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038,” the report said.

Experts warn that it will take tough choices to put the nation’s fiscal house in order.

"To do so will require social insurance program reforms, rationalizing health care promises and reducing related costs, and comprehensive tax reform that will generate more revenue," said Dave Walker, former U.S. comptroller general.

The report comes as Congress faces a possible partial shutdown of the government on Oct. 1 if a new budget or temporary funding measure can’t be agreed on. Weeks after that, the Treasury Department is expected to run out of the temporary measures it’s used since May to pay debts since it hit the so-called debt ceiling. Absent an increase in borrowing authority, the U.S. government could default on debts owed to creditors. The confluence of economic events thus far has spurred more sparring than negotiation to stave off a crisis.

“Are we going to get control of the debt before it reaches a breaking point? The president and congressional Democrats want to wish the problem away. But that’s simply irresponsible,” said Rep. Paul Ryan, R-Wis., the chair of the House Budget Committee. “The report reiterates the obvious: Government spending, especially on health care, is driving our debt. And Obamacare will not solve the problem. The law was a costly mistake. So we should replace it with real, bipartisan reforms.

Congressional Democrats, in turn, questioned the intention of Republicans to come to the negotiating table in earnest.

“They are currently threatening to shut down the government unless we give control of Americans’ health care back to the insurance industry and destroy the protections and benefits in the affordable health care act,” said Rep. Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee. “And they continue to threaten to default on the full faith and credit of the United States, despite the fact that such an unprecedented move would wreak havoc on our economy.”

Republicans want to tie continued financing of the government to defunding or delaying implementation of the health care law. But they’re split: While lawmakers are largely united on the issue, they’re divided on whether to push it.

There’s also talk about some kind of entitlement change, somehow limiting the growth of Social Security and Medicare. Chances are there’s not enough time to make major changes, but congressional leaders could at least make promises they’ll act – enough promises to get a budget passed this month.

David Lightman contributed to this article.

By Kevin G. Hall and William Douglas
McClatchy Washington Bureau