Massive U.S. debt forecast
Analysts say Obama budget is understated
WASHINGTON – President Obama’s ambitious plans to cut middle-class taxes, overhaul health care and expand access to college would require massive borrowing over the next decade, leaving the nation mired far deeper in debt than the White House has previously estimated, congressional budget analysts said Friday.
In the first independent analysis of Obama’s budget proposal, the nonpartisan Congressional Budget Office concluded that Obama’s policies would cause government spending to swell far above historic levels even after costly programs to ease the recession and stabilize the nation’s financial system have ended.
Tax collections, meanwhile, would lag well behind spending, producing huge annual budget deficits that would force the nation to borrow nearly $9.3 trillion over the next decade – $2.3 trillion more than the president predicted when he unveiled his budget request just one month ago.
Although Obama would come close to meeting his goal of cutting in half the deficit he inherited by the end of his first term, the CBO predicts that deficits under his policies would exceed 4 percent of the overall economy over the next 10 years, a level that White House Budget Director Peter Orszag acknowledged Friday would “not be sustainable.”
The result, according to the CBO, would be an ever-expanding national debt that would exceed 82 percent of the overall economy by 2019 – double last year’s level – and threaten the nation’s financial stability.
“This clearly creates a scenario where the country’s going to go bankrupt. It’s almost that simple,” said Sen. Judd Gregg, N.H., the senior Republican on the Senate Budget Committee, who briefly considered joining the Obama administration as commerce secretary. “One would hope these numbers would wake somebody up.”
Orszag defended the president’s agenda in a conference call with reporters, noting that the forecast of bigger deficits and mounting debt is largely due to the CBO’s view that the recession will be more severe and the recovery more tepid than the White House expects.
The White House’s own economic assumptions have come under fire for being too optimistic: Over the next decade, the administration projects that the economy will grow at an average annual rate of 2.8 percent, much rosier than forecasts by the CBO (2.5 percent) and the Blue Chip consensus (2.3 percent).
Orszag, who served as CBO director before joining the Obama administration, also argued that long-term budget estimates are notoriously uncertain. He noted that the CBO’s projections leave open the possibility that the government could record a small surplus, rather than a $750 billion deficit, after five years.
In a speech Friday to state legislators at the White House, Obama said his budget “makes hard choices about where to save and where to spend.”
But, he said: “What we will not cut are investments that will lead to real growth and prosperity over the long term. That’s why our budget makes a historic commitment to comprehensive health care reform. That’s why it enhances America’s competitiveness by reducing our dependence on foreign oil and building on a clean energy economy. And that’s why it makes a down payment on a complete and competitive education for every child in America, from the cradle up through the time that they get a career.”
The CBO is the official scorekeeper for budgeting on Capitol Hill, and the new report could complicate efforts to win congressional approval for Obama’s $3.6 trillion request for the fiscal year that begins Oct. 1. While Obama had predicted a deficit of nearly $1.2 trillion for 2010, the CBO puts next year’s budget gap at nearly $1.4 trillion. And this year’s deficit is now projected to soar past $1.8 trillion, or 13 percent of the economy – the deepest well of red ink since the end of World War II.
Deteriorating economic conditions are a major cause of the darkening fiscal picture, according to the CBO. But other factors also are weighing heavily on the budget this year and next.
For example, the $700 billion financial system bailout is now expected to cost taxpayers at least $350 billion, by CBO estimates, because the investments the Treasury Department has made in banks and other financial institutions are worth considerably less than when the bailout was first approved. In addition, Obama proposes to use a portion of the money to buy down troubled mortgages, a program that will provide no returns to the taxpayer.
The CBO’s estimates assume the Treasury will win approval to spend another $500 billion on the bailout, at an ultimate cost to taxpayers of $250 billion.
The government takeover of mortgage-finance giants Fannie Mae and Freddie Mac is also proving more costly than expected, the CBO reports. On the bright side, however, the CBO projects that it will cost taxpayers less to cover deposits at failed banks than previously projected because federal officials have recently increased insurance premiums.
Democratic budget leaders are currently putting the finishing touches on their versions of Obama’s spending plan, and hope to bring them to a vote in the House and Senate within the next two weeks. Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee, said he has already made “lots of adjustments” that will slice billions from Obama’s spending proposals, generating smaller deficits.
“We’re requiring more things to be paid for and to have tough spending discipline. It’s just got to be done,” said Conrad, who expects to unveil an outline of his budget proposal Tuesday.
Despite the changes, Conrad and House Budget Committee Chairman John Spratt, D-S.C., both said they will preserve Obama’s priorities. “We will follow President Obama’s lead,” Spratt said, “and produce a budget that cuts the deficit in half over the next four years but still invests in areas critical to our future such as energy, education and health care.”
Orszag said such changes are a common part of the budget process.