Transcript: CBO Director Doug Elmendorf on the deficit & ‘fiscal cliff’
Edited by Jenny Jiang
Transcript of remarks by Congressional Budget Office Director Doug Elmendorf on the deficit & ‘fiscal cliff’ on Aug. 22, 2012:
“…This is the fourth year in a row in which the deficit has exceeded $1 trillion. Federal debt held by the public will reach 73% of GDP by the end of this fiscal year – the highest level since 1950 and about twice the share measured at the end of 2007 before the financial crisis and recession.
“As always, we have prepared baseline projections that reflect the assumption that current law generally remained unchanged. Those projections are designed to serve as a benchmark for lawmakers to use in considering changes in laws.
“However, substantial changes to tax and spending policies are scheduled to take effect at the end of this year under current law. And whether lawmakers will allow those changes to unfold or alter them will play a crucial role in determining the path of the federal budget and the economy.
“Therefore, we’ve also prepared projections under an alternative fiscal scenario, which embodies the assumption that many policies that have recently been in effect will be continued.
“I’ll talk about the baseline first and then turn to the alternative scenario.
“Among the policy changes due to occur in January under current law, the ones with the largest impact on the budget are first, the reduction in tax rates and other forms of tax relief originally enacted in 2001 are set to expire. Provisions that limit the reach of the Alternative Minimum Tax – or AMT – already expired at the end of last year. Second, sharp reductions in Medicare’s payment rates for physician services [‘doc fix’] are scheduled to take effect. Third, automatic enforcement procedures specified by the Budget Control Act of last year to restrain spending are scheduled to go into effect. And fourth, extensions of emergency unemployment benefits and a reduction of the payroll tax for Social Security are scheduled to expire.
“If allowed to occur, those sharp reductions in federal spending and increases in taxes will lead to a dramatic reduction in the federal deficit, trimming it by almost $500 billion next year. That would be a significant tightening of fiscal policy and would probably lead to a recession early next year.
“Specifically, our baseline economic forecast show continued modest growth in the economy during the rest of 2012 but a drop in output during the first half of next year at an annual rate of 3%. Following that drop, we anticipate that output will expand again in the second half of next year and beyond. However, the unemployment rate will rise to about 9% in the second half of next year and remain above 8% through 2014 in our forecast under current law.
“Those tax increases and spending reductions will also lead to relatively small deficits throughout the coming decade and a declining path of debt relative to GDP. Our baseline budget projections, which assumes as I said that current laws regarding taxes and spending generally remain unchanged, show deficits close to 1% of GDP in 2015 and later. With small deficits and a growing economy, debt held by the public falls from 73% of GDP in 2012 to 58% of GDP in 2022. That’s what we think will happen under the baseline.
“To illustrate the consequences of possible changes to current law, CBO’s also produced projections under an alternative fiscal scenario, and it incorporates the following assumptions. First, all expiring tax provisions except the current payroll tax reduction are extended indefinitely. Second, the AMT is indexed for inflation after 2011. Third, Medicare’s payment rate for physician services are held constant at their current level. And fourth, the automatic spending reductions required by the Budget Control Act, which are set to take effect in January, do not occur although the law’s original cap on discretionary appropriations are assumed to remain in place.
“That set of alternative policies, which are similar to those that have been in effect in recent years, would lead to budgetary and economic outcomes that would differ significantly both in the near-term and in later years from those in our baseline.
“For 2013, the deficit would again exceed $1 trillion. Deficits would remain very large throughout the coming decade, averaging about $1 trillion a year or 5% of GDP. Revenues would be about 18% of GDP, quite close to their average during the past 40 years. But federal spending would be much higher about 23% of GDP, above its 40-year average of 21%.
“That increase in outlays compared to historical experience reflects much higher outlays relative to GDP for Social Security and the major health care programs. It is partly offset by much lower outlays relative to GDP for all other federal benefits and services taken together.
“With such large deficits, debt held by the public would climb to 90% of GDP by 2022 – higher than anytime since shortly after World War II.
“With that budget path, the economy would be stronger in 2013 and 2014. Economic growth would be modest but we would not anticipate a recession. Instead, real GDP would continue to expand and unemployment rate would move slowly down rather than up.
“However, rapidly escalating federal debt would increase the risk of a fiscal crisis during which investors would lose confidence in the government’s ability to manage its budget. And the government would thereby lose its ability to borrow at affordable rates. Rising debt would also hinder national saving and investment later in the decade, reducing GDP and income relative to what would occur with smaller deficits.
“The policies assumed in the alternative fiscal scenario would put us on a path of federal debt that would ultimately be unsustainable.
“Therefore, as we’ve noted many times before, the key issue facing policymakers is not whether to reduce budget deficits relative to those that would occur under current policies. The question is when. The question is how.
“If lawmakers do not reduce the deficit sharply in 2013 perhaps because of the near-term economic consequences, they will need to reduce it later.
“At some point, we will need to adopt policies that require people to pay significantly more in taxes, accept substantially less in government benefits and services, or both.”
- C-Span.org: Video of Congressional Budget Office press briefing on Aug. 22, 2012
- CBO.gov: An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022
- CBO.gov: Fiscal Tightening in 2013 and Its Economic Consequences – Infographic
- WhatTheFolly.com: CBO warns of approaching ‘fiscal cliff’
- WhatTheFolly.com: Transcript: Sen. Patty Murray challenges Republicans on ‘balanced approach’ to avoid fiscal cliff
- WhatTheFolly.com: House GOP rejects Senate tax cut extension bill
- WhatTheFolly.com: Senate Democrats pass middle-class tax cut
- WhatTheFolly.com: Obama presses Congress to extend middle-class tax cuts
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