Another $1 Trillion Deficit Due To Obama’s Tax And Spending Policies

The government faces a fourth year of trillion-plus deficits in 2012, according to new projections released Tuesday—numbers which also show little relief in the future unless Washington comes to grips with needed changes in its tax and spending policies. The $1.079 trillion deficit now projected for this fiscal year ending Sept. 30 is a step backwards from what CBO had predicted in August. And to punch home its message, the non-partisan agency outlines an especially grim scenario in which Congress not only extends all the current Bush-era tax cuts but pulls the plug on the $1.2 trillion in sequester set in motion by the Budget Control Act last summer.

Under this scenario—which can’t be ruled out politically—deficits would stubbornly hover just under $1 trillion through 2017, adding another $4.7 trillion altogether to the mounting federal debt. Under the more prudent—and many would say unrealistic— scenario of ending tax breaks and implementing cuts, the cumulative deficits would be $1.72 trillion or $3 trillion less from 2013-2017. But even this path comes with a warning from CBO: that debt service costs are already on the rise and will command an ever greater share of the annual budget.

“The federal budget remains out of balance throughout the decade,” the report reads. “The resulting accumulation of debt, along with rising interest rates, drives up the cost of financing that debt; in CBO’s projections, net interest costs grow significantly from 1.4 percent of GDP this year to 2.5 percent in 2022.” To put this in some perspective, by 2017, annual interest payments on the debt would begin to rival and soon exceed what Washington will be spending on Medicaid, the state-federal healthcare program for the poor and disabled. The economy is not forgotten in the report, and in fact appears to be a major reason for the higher deficit predicted for this year.

Last August, CBO had predicted a $953 billion shortfall for the 2012 fiscal year, breaking the string of trillion-plus deficits begun in 2009. The higher $1.079 trillion estimate now is driven largely by lower than expected revenues as a result of CBO downgrading its economic forecast. In August, for example, the agency predicted 2.7 percent growth in real GDP for 2012, when measured fourth quarter to fourth quarter. Unemployment was expected to fall to 8.5 percent. The new forecast predicts 2 percent growth by comparison, and 8.9 percent unemployment.

Comments by Senate Budget Committee Chairman Kent Conrad in reacting to the report captured some of this dilemma. The North Dakota Democrat warned “we will not solve this (deficit) problem unless both sides, Democrats and Republicans, are willing to move off their fixed positions and find common ground.” But mindful of the slow recovery, Conrad argued that the CBO numbers should also spur more immediate action this on extending jobless benefits and a payroll tax holiday, due to expire at the end of February. “Although the economic recovery is strengthening, it is clear the economy remains fragile,” Conrad said. “Failing to extend these critical measures would add further drag to the economy and jeopardize the gains we have already made.” The top Republican on the House Budget Committee was just as strong in his reaction to the deficit figures.

“The CBO’s latest alarm bell couldn’t be more ominous,” said House Budget Committee Chairman Paul Ryan (R-Wis.). “For years, politicians from both political parties have failed to be honest with the American people about the size and scope of the debt threat. The CBO’s report today confirms that it is past time for serious leaders to put aside politics and start forging solutions.” The CBO forecast sets the stage next for President Barack Obama’s own 2013 budget to be released in two weeks on Feb. 13. And as more detail is added, the five and 10 year numbers establish a framework for the scheduled debate this year on renewing major farm and nutrition programs. In this regard, the report reflects some uptick—about $1 billion a year—in agriculture subsidies, largely reflecting the higher cost of government-supported crop insurance premiums as commodity prices are predicted to remain high.

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