The U.S. federal budget deficit is on a trajectory that poses “significant economic risks” and will become unsustainable, Douglas Elmendorf, director of the Congressional Budget Office, said on Monday.
In a presentation delivered before the National Association for Business Economics, Mr. Elmendorf noted that the choices needed to address the medium and long-term budget deficit will be “larger and more fundamental” than in the past.
“U.S. fiscal policy is on an unsustainable path that can’t be resolved through minor tinkering,” he said. “The problem posed by the federal budget deficit not at its current level but on this trajectory… poses a growing risk to the recovery.”
Mr. Elmendorf said that if current tax policy is extended — including the tax cuts enacted by President George W. Bush in 2001 and 2003 which look increasingly likely to be extended beyond their 2010 expiration — the deficit will swell from the $6 trillion baseline forecast by 2020 to just shy of $10 trillion.
In addition, the debt held by the public with current tax policies extended would soar to 90% of GDP by 2020, Mr. Elmendorf said, making the U.S. public debt load one of the world’s highest.
“The U.S. is entering unfamiliar territory in its level of public debt,” said Mr. Elmendorf. “It will be larger over the next decade than it’s been in half a century… and also unfamiliar by the standards of other developed countries.” The choice is not whether to change course from current policy, he noted, but “how quickly and in what way.” President Barack Obama has already declared a spending freeze on discretionary, nonessential outlays, but that only amounts to roughly 17% of total spending. Much of the rest of federal spending is for entitlement programs including Social Security, Medicare and Medicaid, defense spending and interest payments on the federal debt.
The size of U.S. entitlement programs has grown sharply since 1970, from 3.8% of GDP to 8.2% as of 2007, and is expected to hit 11.1% of GDP by 2020 thanks to an aging population of Baby Boomers and fewer workers in the system to help pay for their benefits.
Mr. Elmendorf said one reason entitlements have grown over the last few decades without being accompanied by an obvious increase in taxes or reduction in government spending is because defense spending, which few Americans directly observe, has fallen by half during the same period of time, to 4% of GDP in 2007.
That same pattern can’t be repeated in coming years, Mr. Elmendorf said. “We’ll have to pay for future growth in Social Security, Medicare and Medicaid through a visible increase in the tax burden, a visible reduction in other programs or a visible reduction in these [entitlement] programs themselves,” he said.
-A Wall Street Journal Article
Roger Stix
Atlanta Business Video
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