CBO Warns U.S. Risks Fiscal Crisis

Significant changes needed in tax and spending policies, agency says.

The U.S. government risks a fiscal crisis unless it makes significant changes in tax and spending policies, the Congressional Budget Office said.

The nonpartisan agency said today that without policy changes, the national debt within 15 years will top the historical peak set after World War II. In 1946, government debt amounted to 109 percent of the economy. This year, it’s projected to reach 70 percent of the gross domestic product, up from 40 percent in 2008, according to CBO.

By 2037, the debt would be almost twice the size of the economy, the agency said. That would mean higher interest rates, slower economic growth and far more painful choices for lawmakers than they face today.

The growing debt “would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget,” the agency said in its annual report on the long-term outlook for the federal budget. “Such a crisis would confront policy makers with extremely difficult choices. To restore investors’ confidence, policymakers would need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.”

A so-called fiscal cliff is coming at the end of 2012 when a number of major tax-and-spending changes will automatically take effect. George W. Bush-era income tax cuts will expire as will a temporary cut in the Social Security payroll tax. About $1 trillion in automatic spending cuts will be poised to start, expanded jobless benefits will expire and the government will approach the legal limit on federal borrowing.

Lawmakers are waiting for the outcome of the November election before deciding what to do about the fiscal changes, in hopes that voters will give them a stronger hand in negotiations.

The nation’s lawmakers will face difficult tradeoffs in deciding how to phase in any deficit reduction, CBO said.

“Abruptly implementing spending cuts or tax increases would give families, businesses and state and local governments little time to plan and adjust,” according to the agency. “Immediate spending cuts or tax increases would represent an added drag on the weak economic expansion.”

Yet “cutting spending or increasing taxes slowly would lead to a greater accumulation of government debt and might raise doubts about whether longer-term deficit reduction would ultimately take effect,” CBO said.

 

 

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