By DAMIAN PALETTA
A slowly improving economy and recently enacted tax increases will help bring down the federal deficit for the next few years, the Congressional Budget Office said Tuesday, but it will take another $2 trillion in belt-tightening over the next decade to begin to move the federal debt closer to historic levels.
The updated CBO projections landed amid budget battles in Washington, underscoring not only the distance between the White House and Congressional Republicans on spending but also the gravity of the nation’s fiscal woes.
CBO projects that if Congress leaves current laws unchanged, the debt will be 77% of GDP by the end of the decade, and it will be higher if across-the-board spending cuts are diluted or various expiring tax breaks extended. (The deficit is the difference between spending and revenues in a given year; the debt is the government’s total borrowing, or the sum of past deficits.)
Douglas Elmendorf, director of the nonpartisan agency that advises Congress on budget and economic matters, emphasized the risks of failing to stabilize the debt.
“At this level of debt relative to GDP, our country would be incurring costs and bearing risks of a sort that we have not [had] in our history except for a few years around the end of the second World War,” he said. “At the same time, bringing debt down relative to GDP requires reductions in services that we are getting from the government, or higher taxes paid to the government.”
President Barack Obama and Republicans on Capitol Hill are fighting over what do about $85 billion in across-the-board spending cuts set for March 1 and how best to reduce deficits while accelerating a torpid economic recovery.
On Tuesday, President Obama called for averting those across-the-board spending cuts, at least temporarily, with an alternative package of tax increases and spending reductions.
“There is no reason that the jobs of thousands of Americans…should be put in jeopardy just because folks in Washington couldn’t come together to eliminate a few special-interest tax loopholes or government programs that we agree need some reform,” Mr. Obama said.
Congressional Republicans insist that any move to waive those cuts should rely solely on alternative reductions in spending with no additional tax increases.
“Government spending is completely out of control, and it’s past time for the President and Senate Democrats to drop their poll-tested gimmicks—such as raising taxes on airplanes and energy production—and join Republicans in seeking real solutions to control runaway spending and debt,” said Senate Minority Leader Mitch McConnell (R., Ky.)
For the current fiscal year, which ends Sept. 30, CBO projected the deficit will fall to $845 billion, or 5.3% of gross domestic product, after four years of trillion-dollar-plus deficits. That is well below the 2009 peak and down from last year’s deficit of $1.1 trillion, or 7% of GDP. CBO factored the $85 billion of across-the-board cuts into its projections for 2013.
The CBO report showed how much the deficit has come down—as a share of the economy, it is almost half what it was in 2009—as well as how much more it will take to restore fiscal stability.
The projections will become a measuring stick for a rapid-fire series of budget decisions on Capitol Hill. Three key dates loom for policy makers: the across-the-board spending cuts are set to bite both military and domestic spending on March 1; that is followed by a March 27 deadline for funding government operations for the rest of the fiscal year as well as a new law that withholds lawmakers’ pay unless they vote by April 15 on budget outlines.
Even if Congress allows across-the-board spending cuts to kick in, sunsetting tax provisions to actually expire and Medicare doctor fees to be cut, the deficit is projected to begin increasing gradually from 2016 onward as more of the baby boom generation qualifies for Social Security and Medicare.
Measured against the size of the economy, the federal debt has doubled since the mid-2000s from a sum equal to 36% of GDP in 2007 to 72.5% last year, according to a commonly used measure that excludes Treasury bonds held in the Social Security Trust Fund.
Despite the looming deadlines, Democrats and Republicans remain far apart. Some Democrats and liberal advocacy groups say that stabilizing the debt is sufficient. They would replace the across-the-board spending cuts—which amount to about $1 trillion over 10 years—with $1.4 trillion in spending cuts, tax increases and interest savings.
Others, including Erskine Bowles and Alan Simpson, who led an Obama deficit commission in 2010, argue for reducing the debt significantly more so that the government has maneuvering room in case of recessions or emergencies.
CBO said it would take $2.4 trillion in spending cuts, tax increases and interest savings over the next 10 years to bring the debt down to 67% of GDP by 2023.
House Republican Speaker John Boehner has asked House Budget Chairman Paul Ryan (R., Wis.) to craft a budget outline that would balance the budget in 10 years. CBO said that would require about $4 trillion in deficit-reduction over the decade, significantly more than Mr. Obama is likely to propose in his new budget, to be presented early next month.
The CBO report had at least one bright spot. Federal health spending is growing more slowly than had been anticipated for reasons the nonpartisan agency can’t yet explain.
Federal spending on Medicare for the elderly and disabled and on Medicaid for the poor in 2012 was about 5% below CBO’s March 2010 projection. The agency’s projections for the two programs in 2020 are now $200 billion, or 15%, below the earlier estimates.
The deficit projections rest on the CBO’s new forecast for the economy. It sees U.S. GDP growing just 1.4% this year, measured from the fourth quarter of 2012 to the fourth quarter of 2013, even slower than last year’s 1.9%.
Mr. Elmendorf said that if not for recent increases in payroll and income taxes and spending restraint, the economy would likely grow closer to 3% this year. But he said failure to restrain future deficits would hurt the economy in the long run.
CBO forecasts that the unemployment rate, now 7.9%, will remain above 7.5% through next year. That would make 2014 the sixth consecutive year with a jobless rate that high, the longest stretch of such elevated unemployment in 70 years.
But the agency said the economy is expected to snap back in 2014, with growth of 3.4%.
A version of this article appeared February 6, 2013, on The Wall Street Journal