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Congressional Budget Office anticipates wide budget gap even after economy recovers

In a presentation (PDF) today, Congressional Budget Office director Douglas W. Elmendorf told the National Association for Business Economics that the gap between federal spending and revenues will likely remain “very large” when the U.S. finally returns to normal economic conditions.

Three other CBO observations given during the presentation include:

  • Eliminating waste and inefficiency alone will not put fiscal policy on a sustainable path. What is needed are policy changes that significantly affect popular programs or taxes. Or both.
  • Policymakers will have to face difficult tradeoffs when deciding how quickly to implement policy changes that would reduce future budget deficits.
  • Washington is focusing more on federal budget problems today than any other time since the late 1990s. That focus has led to a wide variety of proposals that vary in their priorities and would fundamentally change the tax code as well as certain government activities.

The CBO presented the following shares of federal spending in 2010:

  • 47%: Transfer payments to people in the U.S.
  • 19%: Purchases of goods and services for defense
  • 14%: Grants to state and local governments
  • 9%: Purchases of goods and services for non-defense
  • 8%: Interest
  • 4%: Other (includes transfers to people outside the U.S.)

Image has not been found. URL: http://images.americanindependent.com/projected-federal-spending-2021.jpgFrom the Congressional Budget Office's March 7 presentation to the National Association for Business Economics

Elmendorf went over several advantages and disadvantages of reducing deficits gradually rather than quickly.

Advantages:

  • Could benefit older generations.
  • Could minimize the drag of spending cuts or tax increases on the economic expansion.
  • Could give more planning and adjustment time to families, businesses and state and local municipalities.

Disadvantages:

  • Reduces U.S. savings devoted to productive capital investment.
  • Requires greater federal spending on interest payments.
  • Gives policymakers less flexibility when unexpected problems arise.
  • Increases the likelihood of a fiscal crisis.

Enacting policy changes now, the CBO says, could allow the government to simultaneously implement change gradually while limiting further increases in federal debt and would likely boost economic activity by holding down interest rates and reducing uncertainty.

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