Congressional Budget Office Releases Bleak New Budget Outlook and Discussions Take Unexpected Turn

Deficit Reduction Meetings Continue Vice President Biden continues to lead bipartisan deficit reduction meetings with Congressional leaders as their self-imposed July 1, deadline for a plan on increasing the nation’s debt ceiling while making spending cuts and providing budgetary reforms approaches.  However, lead House negotiator Majority Leader Eric Cantor (R-VA) withdrew from the discussions today citing a need for Presidential leadership to take tax increases off the table before he returns to negotiation. Meanwhile, the Congressional Budget Office (CBO) has issued the annual Long-Term Budget Outlook, which details an increasing federal debt.   The Outlook is focused on federal government debt held by the public, which is a subset of the total debt that does not include debt the federal government owes to itself (such as the debt owed by the government to the Social Security Trust fund). The report creates two scenarios.  The first adheres to current law, while the second incorporates changes to current law, such as extending current tax cuts or continuing the annual patch on the Alternative Minimum Tax (AMT). CBO specifically cited growing health care costs and the aging baby boomer population as major drivers of government spending.  CBO estimates that federal health spending is set to grow from less than six percent of Gross Domestic Product (GDP) today, to more than nine percent by 2035. Over the last 40 years, public debt has averaged 36 percent of GDP.  At the end of 2008, public debt was about 40 percent of GDP.  By the end of 2011, CBO anticipates that public debt will reach 69 percent of GDP, 7 percentage points higher than last year.  Using the current law estimate, the public debt is expected to grow to 76 percent of GDP by 2021.  Using the alternative estimate, which anticipates no patch of the Alternative Minimum Tax and the “doc fix” (Congress’s annual decision to ease limits on Medicare physician pay), public debt would exceed 100 percent of GDP by 2021, 109 percent of GDP in 2023, and 190 percent of GDP by 2035.  The historical high for public debt as a percentage of GDP is 109 percent.   Many budgetary experts believe that the alternative estimate presents a more realistic picture of our nation’s fiscal situation. CBO believes that continued large deficits will reduce national savings, increase interest rates, lead to more borrowing from other countries, reduce domestic investment and reduce income growth. The large deficits will reduce Congress’s ability to respond to future economic downturns or financial crises.  In addition, CBO predicted that the higher debt levels could lead to a sudden fiscal crisis.  CBO does not make specific recommendations in the outlook.  However, they appear to be sending a clear message to policymakers currently debating our short and long term fiscal situations that they will need to increase revenues substantially, decrease spending, or adopt some combination of the two approaches. For more information, please contact Sean O’Neill at (202) 547-8892 or oneills@agc.org.