CBO Director Douglas Elmendorf told members of a new congressional committee on deficit reduction created in the August debt deal that new economic data gathered in just the last few weeks has resulted in the dimmer projection.
The CBO now reports that the economy will grow by 1.5 percent for the remainder of this year and 2.5 percent in 2012. Just weeks ago, the CBO had forecast unemployment would drop to 8.5 next year and the economy would grow by 2.7 percent next year.
The economy’s continued sluggishness will make the new bipartisan, joint committee’s task harder, Elmendorf told the group, undercutting federal revenues over the next decade.
Elmendorf said the pace of recovery remains highly unpredictable, but that the human costs of the recession have not yet been fully felt and have fallen disproportionately on those who have lost jobs and homes.
The CBO continues to project that the deficit will hit $1.3 trillion in fiscal year 2011 and to forecast that the size of the deficit as a percentage of the nation’s economy will drop markedly in coming years. However, those projections assume that Congress does not extend certain tax provisions that are scheduled to expire at the end of 2011.
If the tax breaks are extended, the deficit will rise much more dramatically.
Beyond the next 10 years, Elmendorf told the panel that the budget outlook worsens, as health care costs grow and the number of elderly Americans enrolled in Medicare expands.
“There is no commonly agreed upon level of federal debt that is sustainable or optimal,” Elmendorf said, according to prepared remarks. “At a minimum, federal debt cannot continually increase as a share of the economy because the interest payments on that debt would then continually grow relative to the size of the tax base that would be available for generating revenues to cover those payments and all of the other activities of the government.”
The “supercommittee” has been charged with cutting the deficit by $1.2 trillion to $1.5 trillion by Thanksgiving or risk automatic cuts to agencies and entitlement programs. But some lawmakers, business leaders and others have urged it to be more ambitious. Elmendorf said if the committee achieves its $1.2 trillion goal, public debt would drop from 67 to 61 percent of the gross domestic product by 2021.
To reduce the public debt to 50 percent of the nation’s total economic output, the same level recorded in the mid-1990s, the committee would have to find $3.8 trillion instead.
Elmendorf told the group that their choices for achieving deficit reduction, as has been widely agreed, include raising federal tax revenues significantly, making major changes to benefits to older Americans or substantially reducing the size of the government relative to the size of the economy.
“The nation cannot continue to sustain the spending programs and policies of the past with the tax revenues it has been accustomed to paying,” he said, according to prepared remarks. “Citizens will either have to pay more for their government, accept less in government services and benefits, or both.”
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