Transcript: CBO Director Douglas Elmendorf’s testimony on the 2014 budget & economic outlook before the House Budget Committee

Partial transcript of the testimony of Douglas Elmendorf, Director of the Congressional Budget Office, on the 2014 federal budget and economic outlook. The House Budget Committee hearing was held on Feb. 5, 2014:

Thank you, Mr. Chairman, Congressman Van Hollen, and members of the committee. I’m very pleased to be here today to discuss CBO’s report on the outlook for the budget and the economy as well as our companion report released yesterday that dug more deeply into the slow recovery of the labor market.

Beginning with the budget. The federal budget deficit has fallen sharply during the past few years and it is on a path to decline further this year and next year.

We estimate that under current law, the deficit will total about $500 billion this year compared with $1.4 trillion in 2009. At that level, this year’s deficit would equal 3% of the nation’s economic output or GDP, close to the average percentage seen during the past 40 years.

The baseline projections show what we think would happen to federal spending, revenues, and deficits over the next 10 years if current law generally were unchanged.

Under that assumption, the deficit is projected to decrease again in 2015 to about 2.5% of GDP.

After that, however, deficits are projected to start rising, both in dollar terms and as a percentage of our nation’s economic output because revenues are expected to grow at about the same pace as GDP whereas spending is expected to grow more rapidly than GDP.

Why the more rapid spending growth? In our baseline, spending is boosted by four primary factors: the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and the mounting interest payments on federal debt.

With no changes in the applicable laws, spending for Social Security will increase from about 5% of GDP in 2014 to 5.5% in 2024.

Spending for the major health care programs – a category that includes Medicare, Medicaid, the Children’s Health Insurance Program or CHIP, and subsidies through insurance exchanges – will climb even more under current laws.

And net interest payments by the federal government are also projected to grow rapidly, mostly because of the return of interest rates to more typical levels.

In sharp contrast, the rest of the federal government’s non-interest spending for defense – for benefit programs apart from the ones I just mentioned, and for all other non-defense activities – is projected to drop from 9.5% of GDP this year to 7.5% in 2024 under current law. That would be the lowest percentage of GDP since at least 1940, which is the earliest year for which comparable data had been reported.

Thus, a sharply increasing share of the federal budget will go to our benefits from a few large programs and a shrinking share will go to most of the rest of the government’s functions under current law.

The large budget deficits recorded in recent years have substantially increased federal debt and the amount of debt relative to the size of the economy is now very high by historical standards.

We estimate that federal debt held by the public will equal 74% of GDP at the end of this year and 79% in 2024 under current law.

Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long-term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis.

Turning to the economy, we expect that after a frustratingly slow recovery from the severe recession of 2007 to 2009, the economy will grow at a solid pace for the next few years but will continue to have considerable unused labor and capital resources or slack.

Further growth in housing construction and business investment should raise output and employment, and the resulting increase in income should boost consumer spending.

In addition, under current law, the federal government’s tax and spending policies will not restrain economic growth to the extent they did last year.

And state and local governments are likely to increase their purchases of goods and services, adjusted for inflation, after having reduced them for several years.

As a result, our baseline shows inflation adjusted GDP expanding more quickly from 2014 to 2017, an average rate of about 3% a year, than it did in 2013.

We expect that those increases and output will spur businesses to hire more workers, pushing down the unemployment rate and tending to raise the rate of participation in the labor force as some discouraged workers return to the labor force in search of jobs.

That effect on participation will keep the unemployment rate from falling as much as it would otherwise. We project the unemployment rate will decline only gradually over the next few years, finally dropping below 6% in 2017 and then edging down further after that.

Nevertheless, the labor force participation rate is also projected to decline further in the next few years because, according to our analysis, the increase in participation stemming from improvements in the economy will be more than offset by downward pressure from demographic trends, especially the aging and the baby boom generation.

After 2017, when the demographic trends will still be unfolding by the effects of cyclical conditions will we expect have largely waned, the participation rate is projected to decline more rapidly and is the reason why beyond 2017 we project economic growth will diminish to only a bit more than 2% per year – a pace that is well below the average seen over the past several decades.

Thank you. Happy to take your questions.


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