The latest outlook from the Congressional Budget Office should really be called the economic and budget picture of best guesses, for now.
Though the new CBO data released on Wednesday paints a more optimistic picture than previous agency reports, this version is predicated on some highly fickle assumptions: from the prowess of the super committee to find consensus this fall, to increased revenue through the expiration of tax cuts, to decreased spending on programs such as federal unemployment benefits.
“If we continue current policies, we will end up with much larger deficits than what would occur under current law,” CBO Director Douglas Elmendorf said at a news conference. “There is a good deal of work left to do.”
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If Congress does not take action and find ways to cut spending and increase the amount of money the federal government collects, the debt held by the public over the next decade could reach 82 percent of GDP, the highest it’s been since 1948.
The uncertainties in the report come from both the way the CBO reports its data and the looming political unknowns. The agency completed this outlook in early July. Though it readjusted its expectations based on the Budget Control Act signed following the debt-ceiling deal, the outlook does not take into account any of the U.S. or European stock markets’ recent volatility.
The report also makes several baseline assumptions, as CBO reports do. However, these assumptions or predictions could change wildly this fall depending on the political will of the 12-member bipartisan super committee and Congress. This report, for instance, assumes that parts of the 2010 tax act, including the Bush-era tax cuts, will expire by the end of 2012. It assumes that the government will reduce Medicare payment rates to physicians by the end of 2011; and it assumes that the plans outlined in the Budget Control Act—the reduction of discretionary spending and the deficit reduction totaling $1.2 trillion—will actually happen.
Numbers and estimates aside, the CBO outlook gives a bleak economic picture for Americans still reeling from the global financial crisis of 2008 and from the recession. The national unemployment rate is expected to remain above 8 percent until 2014. Elmendorf stressed the gap between the country’s economic potential and its real output during a recession, a gap that currently stands at $2.5 trillion. He said the forces weighing on the economy are not expected to subside through 2013, with continued slow economic growth, restraints on the availability of credit, and decreased consumer spending.
The tough money decisions on Capitol Hill will not get any easier as the deficit rises, the economy slowly recovers, and the population ages. He pointed to the Medicare projections, which showed the number of people over the age of 65 in 10 years will be a third larger than it is now, and like everything, that growth will cost the federal government more money.
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