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Malpass: Latest CBO Deficit Estimates — How Big Is Big?

The Congressional Budget Office just released its new budget deficit estimates. It’s a grim read, showing the likelihood of another $1 trillion deficit next year, the fourth in a row, and federal spending still unrestrained.

Relative to its March report, the CBO lowered its deficit estimate for fiscal 2011 (which ends Sept. 30) to $1.3 trillion. However, that was mostly due to individual income taxes coming in faster than expected, not spending cuts.

The deficit is running 8.5 percent of the gross domestic product, increasing the debt-to-GDP ratio to 67 percent by September. That’s nosebleed territory, putting the United States in as precarious a fiscal condition as the southern European punching bags.

For next fiscal year, the CBO is showing a $973 billion deficit, 6.2 percent of GDP, but that’s wishful thinking. It’s based on very rosy assumptions and at least $36 billion in extra tax receipts that won’t materialize.

For example, the CBO is assuming Washington lets the alternative minimum tax jump much higher in January bringing in a quick $11 billion in new taxes by September. And then the CBO assumes a whopping $4.5 trillion in additional revenues from increased AMT taxes over the next nine years all without slowing growth even a smidgen.

In reality, Washington is set to run gigantic deficits for as far as politicians can see. There’s been no progress on fiscal restraint and little is likely under the current legislative and executive branch rules. Congress should have used the debt limit increase to put realistic procedural restraints on spending growth — deficit reduction committees and sequesters haven’t worked in the past and probably won’t this time.

The CBO tried to factor in the results from this year’s knock-down, drag-out Congressional battles over spending. Recall the threat of a government shutdown in April and a default in August. However, the CBO found very little actual spending restraint. The two budget deals actually increased fiscal 2011 spending by $3 billion and reduced spending by only $21 billion in fiscal 2012 (mostly from the discretionary spending freeze).

There will be a few more opportunities for fiscal restraint, but I don’t think they’ll be any more successful than the ones in 2011.

By Oct. 1 Congress will be renewing the continuing resolution that funds the government. But the Obama administration will threaten a government shutdown again unless it gets business as usual — meaning no program terminations, no layoffs, no reductions in government activities, no asset sales and no true cuts.

All members of the House are up for election in November 2012, so the big majority will probably want to avoid an unpopular government shutdown. They’ll get minor spending cuts and then work on their campaigns.

The super committee’s output is due in November. The CBO doesn’t assume it can make any cuts. The panel might get a few done but not enough to move the spending needle back much. This just kicks the can down the road.

Its goal is to get $1.2 trillion to $1.5 trillion in cuts, but the fallback is an across-the-board spending cut starting in 2013. It’s cleverly timed to come after the elections so Congress can rethink any downsizing. And it is set up to hit defense and Medicare spending particularly hard, making it difficult for Congress to let it proceed.

There will also be another showdown on taxes after the 2012 elections, fighting the same battles as in December 2010.

Then, in early 2013, there will have to be another debt limit increase, with the battle lines established in the November 2012 elections but almost sure to include tax increases versus spending cuts, little willpower for asset sales, a reluctance to tackle entitlement reform and an attraction to a balanced budget amendment.

They should focus on replacing the current debt limit, with its unworkable threat to cause a default. Instead, excessive debt should trigger procedures that force Washington to make spending cuts, a process not currently part of the system.

They should also make procedural changes that create more opportunities for tax simplification — lower tax rates on a broader base. The current budget system practically prohibits this approach to unleashing growth and jobs.

In one of its longer-term scenarios, the CBO projects that debt held by the public will reach $19.5 trillion in 2021. Even this big of a debt forecast is wishful thinking. It’s based on rosy assumptions about the economy, spending restraint and tax receipts. To keep debt down to a mere $20 trillion, we’d need fast growth, low interest rates, low inflation and no recession. Good luck with that.

More likely is that the debt-to-GDP ratio is on track toward 85 percent in 2016 and 100 percent in 2021.

For those of us who have done federal budgeting for decades, one of the frustrations is that the issues stay the same while the debt climbs higher and higher.

Washington has developed ironclad defenses for its own survival and enlargement: debt limits that have to go up, spending that automatically grows faster than the economy. tax breaks that expire every year to encourage campaign contributions, and thousands of new agencies, departments, programs and regulations.

The saying in Washington is that elections come and go but the vote of the people always means more spending, staff, lobbyists and government lawyers.

David Malpass is president of Encima Global, an economic research and consulting firm. He previously served as deputy assistant Treasury secretary for developing nations, a deputy assistant secretary of State, Republican staff director of the Joint Economic Committee and senior analyst for taxes and trade at the Senate Budget Committee.

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