The policies, however, are hugely unpopular in both parties. Although they would improve the government’s financial status, the CBO said the nation could pay a steep economic price. Unemployment, which has drifted down to 8.5 percent, could rise to 8.9 percent by this fall and jump back up to 9.2 percent by the end of next year, the CBO said.
“The amount of higher revenue and lower spending that would occur under current law is really quite sharp,” CBO Director Douglas Elmendorf told reporters, putting the impact of scheduled austerity at $400 billion in 2013 alone. “We think that will be pushing down the economy as other factors are starting to push the economy up.”
Policymakers are already talking about ways to short-circuit the changes, or at least postpone them until a new Congress — and perhaps a new president — gets settled after the November elections. But doing so could raise fresh threats to the nation’s financial health, the CBO said. Simply preventing the expiration of the George W. Bush-era tax cuts would slash revenues by $5.4 trillion through 2022, forcing Treasury to increase the rising national debt by a similar sum.
Despite a series of high-stakes showdowns over the debt last year, the new CBO report underscores how little progress President Obama and Republicans in Congress made toward solving the nation’s biggest budget problem: how to care for an aging population. Although they have agreed to ratchet agency budgets down toward historic lows, Elmendorf said they will be unable to tame the debt unless they raise taxes well above historic levels or make “large changes” in popular social programs such as Social Security and Medicare.
“The gap that’s opened between what we are used to getting from the government . . . and the revenue we’re used to giving to the government has widened a great deal,” he said.
The White House and Republican lawmakers quickly blamed each other for the continuing fiscal mess. Noting that 2012 will mark the fourth consecutive year of trillion-dollar deficits, House Majority Leader Eric Cantor (R-Va.) urged voters to change course.
“We know that President Obama’s policies have failed to produce the economic growth needed to pay down these massive deficits that are creating uncertainty, preventing economic recovery, and harming job creation,” Cantor said in a written statement. “When something doesn’t work, you change it. Let’s try something new.”
White House press secretary Jay Carney fired back that Cantor and other Republicans had decided to “walk away” from negotiations with Obama over a “grand bargain” to reduce borrowing that would have raised taxes and cut spending on government retirement programs.
“That deal remains available,” Carney said. “What has been lacking thus far is any willingness to deal with revenue in any meaningful way by the Republicans.”
Obama is scheduled to unveil his latest budget blueprint on Feb. 13.
The CBO takes stock of the federal budget three times each year: in January, upon receipt of the president’s budget and again in August. The agency’s projection for the 2012 deficit has increased slightly since the summer, primarily because of weaker-than-expected tax receipts on corporate profits and the decision to extend a cut in the Social Security payroll tax through the end of this month.
Lawmakers in both parties want to extend the tax break through the end of 2012. Unless they come up with a plan to replace the lost revenue, however, the new extension would add an additional $75 billion to this year’s budget gap.
The accumulation of large deficits in the wake of the Great Recession has required the nation to borrow heavily, and the portion of the debt held by outside investors has doubled since 2007.
The CBO projects that it will rise to 72 percent of the economy by the end of this year — the highest since World War II — and begin to drift downward if the Bush tax cuts expire and other austerity measures take effect as scheduled.
Without those changes, however, the national debt would continue to soar, the CBO said, with the portion held by outside investors rising to 94 percent of the economy by 2022.