(Washington Times) – President Obama and Congress are flirting with both a recession and a bigger jump in unemployment next year unless they head off looming tax increases and spending cuts â€” but doing so could mean a fifth straight year of trillion-dollar deficits, the government’s chief scorekeeper said Wednesday.
The latest update by the Congressional Budget Office shows the time for hard choices that lawmakers have feared for years is now here: Leaders must choose between economic pain and budget-tightening now, or continuing to bolster the U.S. economy with the risk of a bigger fiscal collapse later.
Already baked into the numbers is the deficit for fiscal year 2012, which will top $1.1 trillion â€” the fourth-straight year of trillion-dollar deficits, dating back to the end of President George W. Bush’s term and covering all of President Obama’s three and a half years in office.
“The key issue facing policy makers is not whether to reduce budget deficits,” said Douglas W. Elmendorf, director of CBO. “The question is when. The question is how.”
He said even if the economy picked up, the government will still run major deficits over the decade, meaning the fiscal imbalance is caused by the spending promises the government has made outstripping the amount of money it’s likely to raise in taxes.
“At some point we will need to adopt policies that require people to pay significantly more in taxes, accept substantially less in government benefits and services, or both,” Mr. Elmendorf said.
Either way, there will be pain. Even if the government continues pumping cash into the economy, the unemployment rate will average 8 percent next year. But the pain is worse if the money stops: Joblessness would peak above 9 percent and remain above 8 percent at least through the end of 2014.
If Congress leaves the government on autopilot and hits what has become known as the “fiscal cliff” â€” including ending the Bush-era tax cuts and allowing scheduled spending cuts to go into effect â€” the federal deficit will drop to $641 billion in 2013, or 4 percent of gross domestic product.
That fiscal cliff would be the biggest one-year drop in deficits, as measured by GDP, since 1969.
But if Congress cancels the spending cuts and extends all of the tax cuts, the deficit would be $487 billion deeper, topping $1 trillion for the fifth straight year.
Republicans are currently pushing for an extension of all of those tax cuts and for canceling the spending cuts to defense, while Democrats want to see an extension of most of the Bush tax cuts and are conflicted on how to approach the spending side.
The major difference in tax plans is that Mr. Obama has called for couples earning at least $250,000, and individuals earning $200,000, to see their income tax rates rise to pre-Bush levels.
CBO said the difference between the GOP and Mr. Obama’s plan amounts to $42 billion in extra revenue next year, and $824 billion over the next decade.
Even if Congress were to extend the tax cuts and cancel spending cuts, CBO projects the economy will only grow at 1.7 percent in 2013, and unemployment will still hit 8.7 percent at some point, and average 8 percent for the year.
“Republicans in Congress refuse to enact the president’s plan, choosing instead to protect special interests and tax breaks for the wealthiest in our country,” said rep. Chris Van Hollen, ranking Democrat on the House Budget Committee. “It’s time for Republicans to put aside partisanship and focus on the real concerns of the nation.”
But Rep. Jeb Hensarling, chairman of the House Republican Conference, blamed Democrats for holding up the GOP’s plans.
“In 2009, President Obama said, ‘I refuse to leave our children with a debt that they cannot repay,’ but CBO’s analysis shows that the president is doing just that,” Mr. Hensarling said.
In other grim measures, CBO said the important yardstick for government debt has doubled over the last five years, from 36 percent of GDP to 73 percent of GDP.
But the size of the debt depends on what choices lawmakers make now.
If they allow the tax cuts to expire and spending cuts to take effect, the debt will have dropped to 59 percent of GDP in a decade. But if Congress continues to push off that pain, it would mean an additional $8 trillion in debt over the next 10 years, reaching 89 percent of GDP in 2022.