Wednesday, January 26, 2011

CBO issues stark warning on US debt

The big headline number from Wednesday’s Congressional Budget Office report is a jolting shot of bad news: a budget deficit this fiscal year of close to $1.5 trillion, or 9.8 percent of gross domestic product (GDP).

That’s nearly as big as 2009’s shortfall, which was the highest in nearly 65 years. The $1.5 trillion deficit would be a nominal record, but not quite as big as the 2009 deficit when measured as a percentage of the economy.
Story: CBO: U.S. budget deficit to hit $1.5 trillion

More bad news: CBO’s forecasters don’t see employment returning to anything like normal before 2016.

Look inside the 190-page report and you’ll find facts, figures and forecasts that could help Republicans make their case that deficits and debt must be cut now. But you’ll also find other data that can aid President Barack Obama and Democrats in making their budgetary arguments — especially on the fiscal rationale for not repealing the health care law.

Wednesday’s report carries political weight. Even though congressional Republicans have heaped abuse on the CBO for reporting last year that the health care bill that Obama signed into law would reduce the deficit, CBO still remains the neutral, professional budget scorekeeper. It sets the terms of the debate.

Arguments for cutting spending and debt

For Republicans, the CBO report supplies powerful arguments for cutting spending and reducing debt.

The CBO’s new estimate of the deficit for 2011 is $414 billion larger than the one the office produced last August

The new report uses the word “unsustainable” to describe deficits and debt in the years ahead.

It warns that interest rates — which it says are “very low by historical standards” right now — will go up and will drive up the cost of paying off the debt. Interest payments on the debt “are expected to skyrocket.” CBO projects that the government’s yearly net interest spending will more than triple between 2011 and 2021

As if that weren’t frightening enough, the CBO warns in unusually stark language — as it has before — of the potential for a sovereign debt crisis. The report uses the words “Greece” and “Ireland” only once but it spells out a scary scenario in detail.

Risk of 'a sudden fiscal crisis'

The growing debt, it says, “would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.”

It warns that “as other countries’ experiences show, investors can lose confidence abruptly and interest rates on government debt can rise sharply and unexpectedly. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory. ... There is no way to predict with any confidence whether and when such a crisis might occur and no identifiable tipping point of debt relative to GDP.”
Read the rest here.

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