Long-Term Budget Outlook: CBO dismal assessment

The Congressional Budget Office issued a report today entitled The 2012 Long-Term Budget Outlook. It attempts to project over the next 25 years the fiscal health, trends and impact of the Federal budget. Of course, it will be wrong as assumptions are effected by changes in law and economic conditions in addition to other things. (Like wars) However, it is a useful piece of work.

The fundamental flaw in the presentation is to couch everything in terms of percentages of Gross Domestic Product (GDP) and not in actual dollar terms. The conclusions of the trends are the same but there is something to see the federal debt now approaching $16 trillion increase by trillions of dollars more. Picky point, I know. 

The report sets forth two different scenarios to draw its conclusions. There is a baseline scenario where current laws generally remain unchanged. This means the tax cuts enacted since 2001 expire as scheduled in 2012. Other temporary tax provisions, including the reduction in the payroll tax rate are also assumed to expire as scheduled.

In addition, the exemption amounts for the individual alternative minimum tax (AMT), which has reverted to its pre-2001 amount in 2012, are assumed to remain at the lower amounts subjecting some 20 million or so taxpayers to the AMT. Never going to happen in my opinion. Congress has enacted many temporary increases in the AMT exemption; the latest increase expired at the end of 2011. The AMT rollback is a bit of a bogus issue and huge dollar amounts skews the figures although in the document just when the eyes are about to glaze over, the separate impact of the ATM is broken out.

A serious problem for this scenario is that it assumes all the tax cuts expire. Even the liberals in Congress plus the Administration support extending the tax cuts to taxpayers with less than $250,000 (or whatever the number of the day is)

The second CBO projection assumes current policies as opposed to the actual law continue. This alternative fiscal scenario assumes most of the individual, corporate and estate and gift tax provisions scheduled to expire are extended through 2022; In addition, the relief from the AMT is also extended. The sole exception to those extensions is the temporary employee payroll tax cut first enacted in the 2010 tax act will expire which is a general expectation.

So, what does it all mean? It means the federal budget will take an increasingly higher and higher share of the economy. It means the federal deficit will continue to grow by leaps and bounds, although less so if all the tax cuts are allowed to expire, the trade off being short-term sluggish growth.

The report also discusses the federal spending side of the equation. What do we learn for those?

 Health care is eating and will continue to eat the federal budget.

Social Security, while not as burdensome as health care, will continue to grow. The program now requires the government to pay out more in benefits than it takes in so borrowings are required, adding to the deficit. It only gets worse as the current ratio of five workers supporting one beneficiary will soon be two workers supporting one beneficiary.

What out the interest payments? CBO tries to bury them to a certain degree but with the debt ballooning, they are hard to avoid. In the non-realistic baseline case (due to some tax cut staying in effect), net interest outlays increase from 1.4 percent of GDP in 2012 to 2.0 percent in 2017 and 2.5 percent in 2022. Federal debt may decline as a share of GDP but interest spending increases because interest rates are expected to rebound from their current unusually low levels. 

What does all this mean? All this debt, interest payments? Simple answer according to CBO:

• Increased debt means higher interest payments on debt, which requires higher taxes, a reduction in government benefits and services, or some combination thereof;

• Increased debt restricts the ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises;

• Increase debt increases the probability of a sudden fiscal crisis eroding confidence in the government’s ability to manage its budget with the government losing its ability to borrow at affordable rates.

There is no real comfort found in the report. The Federal budget, the growth of government and the debt are all out of control. This scenario, that scenario, makes no fundamental difference. Run our of gas in the middle of the Mojave desert in high summer or spring a leak in the lifeboat 500 miles from shore. Make the choice.

There eventually has to be some action on how to tackle the deficits but it is a tricky proposition. Reducing projected spending or increasing taxes slowly leads to more government debt On the other hand, severe and immediate spending cuts or tax increases would be added drag on the meager economic recovery.

There are no revelations in this report, although it is chalked full of information. The fuse is lit, the bomb will go off. The fiscal situation of the federal government is a mess, a result of years of budget games, mismanagement, bad decisions, and terrible economy. The situation has been exacerbated by the fiscal callowness of the Obama Administration and the intractability of their opposition. Confidence is not high with this group leading us. 

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[Pillsedo]

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