CBO Report: Scary, Dismal and Elephants in the Room

The Congressional Budget Office released yesterday its economic and budget analysis for 2012 and beyond. It is a one-day news story but paints a grim picture of the national outlook. It is so horrible and the consequences so dismal that it defies imagination. It begs the questions: How did this happen? What is being done to address the problems?

CBO projects a $1.1 trillion federal budget deficit for fiscal year 2012 if current laws remain unchanged. The current deficit projection is slightly higher than the one made at the end of the summer. The deficit will be slightly lower than last year but this will be the 4^th year in a row in the Obama era the deficit is over a trillion dollars. The national debt passed the $15 trillion last year and is well on its way to $16 trillion.

While declining, it will still be higher than any deficit between 1947 and 2008. The deficit number is simply massive, unsustainable, and will create incredible problems in just servicing it in the years to come and will really bite once interest rates return to historical or even above historical levels.

Now, this is where it gets interesting. Over the next few years, projected deficits in CBO’s baseline decline sharply. Now that is good news but how can it be?  What miracle has happened? That is the herd of elephants in the room.

Much of the projected decline in the deficit occurs because, under current law, revenues are projected to shoot up by almost $800 billion, or more than 30 percent, between 2012 and 2014. The increase is mostly the result of the recent or scheduled expirations of tax provisions, such as those enacted in 2001, 2003, and 2009 lowering income tax rates and limiting the number of people subject to the alternative minimum tax (AMT).

The reports goes on to point out the strong increase in revenues will have a dramatic drag on economic growth and exacerbates an already dismal economic situation. Now that is a dilemma.

Of course, the elephants in the room are the expiring tax cuts. If nothing is done, then everyone in the country will pay more and more. If extended, deficits will continue perhaps allowing some recovery to continue but to the long term create the adverse effect of increasing debt service. Quite a conundrum. To me, the expiring tax cuts are the overwhelming and overarching issue and the choice the electorate must make in November.

The other part of the equation is Federal spending. Federal spending as a percentage of GNP is in the extremis level. Projections are below previous estimates but that is due to the “sequestration” agreed to as part of the Federal Debt negotiations last August. These 10-year reductions have yet to take effects. However, Federal spending will continue to rise, health spending will increase (particularly after 2014 when some more 15 million people go on the Federal health dole), Social Security will write more checks than it collects and so on and so on. The small, picayune reductions in future spending (which are not actual real cuts) are pathetic and little more than window dressing.  

It is a mess. Congress is paralyzed and bickering. Each points to finger at the other. The Administration is impotence, refuses to lead and seems not to care about anything except re-election.

The CBO report is worth a read but the value of the projections are dependent on the outcome of the tax provisions. The report does contains plenty of data, different scenarios and historical information but the overall message is clear--bad times will continue and the country is in an almost a no-win situation. 

 

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