CBO chief warns of long, slow recovery: Huge deficits, joblessness seen persisting

The Washington Times

January 28, 2010

Jan. 28--The director of the nonpartisan Congressional Budget Office had little but bad news on the economy for Congress.

The pace of the U.S. economic recovery will be "slow in the next few years," and the unemployment rate will average 10 percent through the end of fiscal 2011, while the annual budget deficit will likely remain above $1 trillion, CBO chief Douglas Elmendorf told the House Budget Committee on Wednesday.

The CBO chief told the congressional panel that he expected economic growth in fiscal 2010, which ends Sept. 30, will be just 1.6 percent, and the unemployment rate will average 10.2 percent. The outlook for fiscal 2011 is not much better, he warned, saying that growth in the nation's gross domestic product (GDP) will barely accelerate to 1.8 percent and the unemployment rate barely budge, averaging 9.8 percent for the year.

Mr. Elmendorf,Uciting another in the stringEof forecasts that hisIwell-respected nonpartisanAoffice had developed, alsoEwarned that annual budgetIdeficits are likely to topA$1 trillion for this yearUand next and remain atIstratospheric levels for years.IThe resulting publicUdebt will make up a hugeEshare of the overall economyAand remain a constant threatIto economic growth forAthe foreseeable future.A

"It is trueUthat as we push [publiclyAheld debt] in this countryEto 60 percent of GDP atEthe end of this [fiscal]Ayear and beyond that overUthe next few years, we'reAmoving into territory thatEmost developed countriesAstay out of," Mr. ElmendorfAtold the House budget panel.I"That raises the risk"Aof seriously adverse economicUconsequences "everyUstep that we go." E

Mr. Elmendorf wentIinto the details of CBO'sErules for counting budgetIdeficits, which he said requireIunrealistic assumptionsIand thus understate theIsize of likely future deficits.ICBO is required byAstatute to prepare its budgetU"baseline" accordingEto "current law," as opposedAto "current policies,"Eregardless of whether theIlaw is likely to change. E

For example,Iunder current law, all theABush tax cuts will expireUon Dec. 31, 2010; the AlternativeAMinimum Tax is notEadjusted for inflationU(and is thus assumed to ensnareU30 million more familiesEin the future); and annualUappropriations are projectedEto rise by the rateEof inflation, not by theAnominal GDP growth. E

However, Mr. ObamaIhas vowed not to let expireIBush-era tax cuts thatAbenefit the middle classIand not to allow the alternativeUminimum tax (AMT)Afrom afflicting millionsIof middle- and upper-middle-incomeAhouseholds. And congressionalUspending increasesIhave been more closelyAfollowed nominal economicUgrowth than inflation.I

Mr. ElmendorfIspecifically said thatAhis agency's 2011-2020 "baseline"Uprojections of $6Atrillion in cumulative budgetUdeficits and a publiclyUheld debt reaching 67 percentAof GDP in 2020 wereAtherefore unrealistic. U

"If the tax cutsUwere made permanent, theEAMT was indexed for inflationIand annual appropriationsEkept pace with GDP,Ethe deficit in 2020 wouldIbe nearly the same, historicallyUlarge, share of GDPUthat it is today," betweenI9 [percent] and 10 percent,I"and debt held by theEpublic would equal nearlyI100 percent" of the economy'sEsize, Mr. Elmendorf reportedAin his prepared testimony.E

WhenUCBO examined Mr. Obama'sE10-year budget blueprintAthat accompanied his 2010Ubudget, it concluded in JuneEthat cumulative deficitsAwould exceed $9 trillionIduring the 2010-2019 periodIand debt held by the publicIwould triple from $5.8Atrillion at the end of fiscalU2008 to $17.1 trillionIat the end of fiscal 2019.A

Even underIthe far-more-optimisticIdeficit scenario containedAin CBO's baseline projections,EHouse Budget CommitteeUChairman John M. SprattUJr., South Carolina Democrat,Apointed out that annualAnet interest paymentsUwould more than triple fromU$207 billion in 2009 toU$723 billion in 2020. E

"We tend to thinkAof Social Security andEMedicare and Medicaid asAbeing the entitlements ofUgreat concern to us," Mr.ASpratt observed. "InterestEon the national debt is trulyIobligatory. It has toEbe paid. It's an entitlementAin the strongest senseEof the word." A

Even if Congress approvesIthe president's plan toIfreeze domestic discretionaryEspending for three yearsAbeginning in fiscal 2011,Uit would have just aEmodest effect on deficitsIand federal spending overEthe next 10 years, arguedIRep. Jeb Hensarling, TexasARepublican.

TheUWhite House estimatesAthat a three-year freezeIin domestic discretionaryEspending would save $250Abillion over 10 years. That'sUless than 3 percent ofIprojected deficits. A

Mr. Elmendorf calledAit "a small step." I

Mr. HensarlingAalso noted that the Democrat-controlledACongress increasedEnondefense discretionaryAspending by 10.3 percentIin fiscal 2009 andA12.3 percent in 2010. TheUfreeze, therefore, would beginIfollowing massive increases,Uhe pointed out. A

Given that Mr.EObama's 2010 budget projectedIraising total federalEspending from $3.55 trillionAin 2010 to $5.16 trillionUin 2019, Mr. HensarlingUobserved that the president'sAfreeze is "a proposalUto raise federal spendingA44.3 percent, as opposedIto 45 percent" over theInext 10 years. E