Transcript: Press briefing remarks by CBO Director Douglas Elmendorf on the 2013 U.S. budget & economic outlook

Transcribed & edited by Jenny Jiang

Transcript of press conference remarks by Douglas Elmendorf, Director of the Congressional Budget Office (CBO), on the 2013 U.S. budget and economic outlook on Feb. 5, 2013:

Our analysis shows that the United States continues to face very large economic and budget challenges.

Under current law, we expect the unemployment rate will remain above 7.5% through next year. That would make 2014 the 6th year in a row with the unemployment so high – the longest such period in 70 years.

Also under current law, we expect budget deficits over the next decade would total about $7 trillion. With deficits so high, the federal debt held by the public will remain a larger percentage of GDP than in any year between 1951 and 2012. By the end of the decade, debt would be 77% of GDP and on an upward path.

Let me elaborate on those points beginning with the economy and then turning to the budget.

We anticipate that economic growth will remain slow this year because the gradual improvement that we see and underlying economic factors will be offset by a tightening of fiscal policies scheduled under current law.

The good news is that effects of the housing, financial crisis appear to be gradually waning. We expect an upswing in housing construction, rising real estate and stock prices, and increasing availability of credit will help us spur a virtuous cycle of faster growth in employment, income, consumer spending, and business investment over the next few years.

However, several policies that will help to bring down the budget deficit will represent the drag in economic activity this year. The expiration of the 2% cut in Social Security payroll tax, the increase on tax rates for income above certain thresholds, and the cuts in federal spending scheduled to take effect next month will mean reduced spendings by both the consumers and the government.

We project that inflation-adjusted GDP will increase about 1.5% in 2013 but that it would increase roughly 1.5% faster if not for the fiscal tightening.

After the economy adjusts to that fiscal restraint, we expect the growth in real GDP will pick up to about 3.5% per year in 2014 and the following few years.

But the gap between the nation’s GDP and what it is capable of producing on a sustainable basis – what we call potential GDP – will not close quickly at that rate of growth.

Under current law, we expect output to remain below its potential level until 2017 – almost a decade after the recession started in December 2007.

By our estimates, GDP was more than 5% below its potential level in the 4th quarter of last year – a gap that is only modestly smaller than the gap that existed 3 years ago. Because growth in output since then has been only slightly faster than growth to potential output.

The nation has paid and will continue to pay a very large price for the recession and slow recovery. We estimate the total loss of output relative to the economy’s potential between 2007 and 2017 will be equivalent to nearly half the output produced in the country last year.

With the gap between actual and potential output projected to close only slowly, we expect unemployment rate to stay near 8% this year, to fall below 7% only in 2017, and to reach 5.5% in 2017.

Let me turn now to the budget. Under current laws, the federal budget will shrink in 2013 for the fourth year in a row an estimated $845 billion.

The deficit would be the first in 5 years below $1 trillion, and at 5.25% GDP it would only be about half as large relative to the size of the economy as the deficit was in 2009.

Our projections based on current laws, show deficits continuing to fall over the next few years, reaching about 2.5% of GDP in 2015 before turning up again to nearly 4% by the end of the decade.

A big reason for declining deficits is that federal revenues are projected to grow because of both the expanding economy and changes in tax rules that are scheduled under current law.

As a result, the expected revenues, which were less than 16% of GDP in 2012, will be about 19% in 2015.

Under current law, we expect that revenues will then remain at roughly 19% of GDP for the rest of the decade. compare to an average – as shown the picture – of about 18% over the past 40 years.

At the same time, under current law, our projections show federal spending falling relative to the size of the economy over the next several years.

Spending that goes up when the economy is weak – like unemployment benefits – is expected to drop off, and the cap on discretionary spending will restrain spending.

After 2017, though, spending in our projections starts growing again as a percentage of GDP.

The aging of the population, increase in health care costs, and a significant expansion of eligibility for federal subsidy for health insurance will push up spending on Social Security and the major health care programs.

In addition, the return of interest rates to more normal levels will push up interest payments to their highest share of GDP in 5 decades.

During the past 40 years, federal spending has averaged 21% of GDP. In our projection for 2023, spending is about 23% of GDP and rising.

What would debt look like under those circumstances?

We expect that, again under current law, federal debt held by the public will reach 76% of GDP by the end of this fiscal year – the largest percentage since 1950. It would then remain above 73% throughout the decade, far higher than the 39% average seen over the past 40 years. Remember that as recently as 2007, debt was only 36% of GDP.

By 2023, with a budget deficit equalled to almost 4% of GDP, debt would 77% of GDP and rising.

Rough stability in debts as a share of GDP over the next 10 years will be a welcomed development after a sharp upward surge during the past few years.

But debt between 70% to 80% of GDP and rising will remain a significant concern for several reasons. First, the crowding out of capital investments will be greater. Lawmakers will have less flexibility than they might ordinarily have to use tax and spending policies to respond to unexpected challenges, like a recession or a war. And there will be heightened risk of a fiscal crisis in which the government will be unable to borrow at unaffordable rates. Those are all effects of having such a high debt to GDP ratio.

But second, debt would be even larger if current laws are modified as they’ve been in the past to delay or undo certain changes in scheduled policy.

For example, if lawmakers eliminated the automatic spending cuts scheduled to take effect in March but left in place the original caps from the Budget Control Act, if they prevented the sharp reduction in Medicare payment rates to physicians from taking effect early next year, and if they extended the tax provisions that are scheduled to expire, then budget deficits would be substantially larger than our baseline projections, and debt held by the public would rise to 87% of GDP in 2023 rather than the 77% under current law.

Third, debt might also be larger in our projections because even the original caps on the discretionary funding would reduce such spending to an unusually small amount relative to the size of the economy and that might be difficult to sustain. CBO projects that with just those original caps in place, discretionary spending would equal 5.8% of GDP in 2023 – a smaller share in any year in at least the past 50. Because the allocation of discretionary spending is determined by annual appropriations amount caps, lawmakers have not yet decided which specific government services and benefits will be reduced or constrained to meet the specified limits.

And fourth, projections for the 10-year period covered in this report do not fully reflect the long-term budget pressures.

Because of the aging of the population and rising health care costs, a wide gap exists between the future costs of the benefits and services the public is accustomed to receiving from the government, especially in the form of benefits for older Americans, and the tax revenues that the public has been sending to the government.

It is possible to keep the policies for those large benefit programs unchanged but only by raising taxes substantially for a broad segment of population.

Alternatively, it’s possible to keep tax revenues at their historical average of percentage of GDP but only by making substantial cuts relative to current policies in the large benefit programs that aid a broad group of people at some point in their lives.

Deciding now what combination of policy changes to make to resolve that imbalance would allow for gradual implementation, which would give households, businesses, and state and local governments time to plan and time to adjust their behavior.



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