Chris Hildebrand contributed to this post.
Americans continue to hope for an expedient and smooth economic recovery, despite the nearly-constant stream of gloomy news. Compounding our flagging recovery is the federal budget imbalance, which continues to be a nightmare for policymakers and Americans alike. Deficits are reaching historic levels, and the Congressional Budget Office’s (CBO) latest long-term budget outlook released yesterday paints a damning picture of America’s future if our fiscal course is not adjusted – and soon. America, like the Titanic so long ago, is driving towards a date with disaster, and the time we have to change our course and avoid the economic iceberg ahead is quickly running out.
The CBO June budget outlook presents two fiscal scenarios: an extended baseline scenario, in which current law is implausibly allowed to fully take effect (e.g., all the Bush tax cuts expire, the Medicare physician payments are cut by 30%, and the AMT is allowed to hit more and more taxpayers); and the Alternative Fiscal Scenario (AFS) that serves as a more plausible depiction of what Congress is actually likely to do (e.g., full extension of the Bush tax cuts).
The more realistic scenario, the AFS, paints a very scary picture. Revenues do not increase as they do under the extended baseline because current tax cuts are assumed to be extended indefinitely (including the estate tax provisions from last December’s tax cut compromise and the host of tax expenditures that seemingly get extended every year). The scenario also patches the AMT and assumes that Congress will enact a permanent “doc fix,” both of which are policies that will worsen the deficit. The CBO warns that “under [these] policies, federal debt would grow much more rapidly … debt as a share of GDP would exceed its historical peak of 109 percent by 2023 and would approach 190 percent in 2035.”
While the CBO report is certainly sobering, it also serves to further reinforce the need for a balanced and comprehensive approach to deficit reduction. Major reform of the entitlement programs as well as increased revenue need to be components of any successful plan. Thankfully, there are proposals that take the problem seriously, and put all options on the table: BPC’s Restoring America’s Future addresses both revenues and the major entitlements, while also taking steps to encourage short-term growth. Other plans, such as that of the president’s fiscal commission, also contain serious and effective options that policymakers should consider.
The bottom line of the CBO report is that serious and balanced deficit reduction is needed. How many more warnings and opportunities to shift our course will we get before hitting the iceberg floating right ahead of us?