April 15, 2024

Economy Hampers Deficit Panel, Budget Office Says

At the same time, the director, Douglas W. Elmendorf, told a powerful new Congressional committee on deficit reduction that the government’s growing debt would “lead to lower output and incomes” and could “increase the probability of a sudden fiscal crisis.”

As the 12-member panel began its race against a November deadline to recommend substantial federal savings, Mr. Elmendorf said its task had become more difficult because the outlook for the economy had worsened in the last month.

“We expect employment to expand very slowly during the rest of this year and next year, leaving the unemployment rate close to 9 percent through the end of 2012,” Mr. Elmendorf said.

The panel is supposed to recommend ways to reduce federal deficits by at least $1.2 trillion over 10 years, or else the government will make across-the-board cuts in many federal programs to achieve those savings.

Under the law, the committee must take a final vote by Nov. 23, but Mr. Elmendorf said his office would need a legislative proposal by early November to assess its impact on the deficit.

Republican members of the panel said growth in federal spending — for Medicare, Medicaid and Social Security, in particular — was the main factor in the nation’s fiscal problems. Mr. Elmendorf said spending for the big three benefit programs would account for 12.2 percent of the gross domestic product in 2021, compared with an average of 7.2 percent in the last 40 years.

The difference, 5 percent of the economy, “is a very big number,” Mr. Elmendorf said.

Democrats said higher revenues were essential. Federal revenues are equivalent to 15.3 percent of the G.D.P. this year, compared with an average of 18 percent over the last 40 years, the budget office said. Under current law, which provides for the expiration of Bush-era tax cuts in 2013, revenues will grow to nearly 21 percent of the economy by 2021, it said.

Representative Chris Van Hollen, Democrat of Maryland and a member of the committee, said that without higher revenues, “you are talking about dramatic cuts in health and retirement security for America’s seniors.”

But Representative Dave Camp, Republican of Michigan and chairman of the House Ways and Means Committee, said, “Federal revenues have equaled or exceeded 20 percent of G.D.P. only three times: in 1944 and 1945, during World War II, and in 2000,” when the government ran a surplus.

Two Republicans on the deficit reduction committee, Senator Jon Kyl of Arizona and Representative Fred Upton of Michigan, said they believed that the government could save large amounts of money by rooting out fraud and waste in benefit programs.

Mr. Elmendorf told lawmakers that “there is no evidence” to suggest that such antifraud efforts could produce a large share of the $1.2 trillion in deficit reduction the panel is supposed to recommend.

The budget office director put a price tag on the cuts that would occur automatically if legislation originating in the committee did not become law by Jan. 15.

Military spending would be cut by $454 billion over 10 years, Medicare by $123 billion and other domestic programs by more than $300 billion, he said. With these cuts, the government would have less need to borrow, so debt-service costs would be reduced by nearly $170 billion over 10 years, he added.

Senator Rob Portman, Republican of Ohio and a member of the panel, said the goal of saving $1.2 trillion to $1.5 trillion was formidable but realistic in the larger context of federal spending. The budget office estimates that the federal government will spend $44 trillion in the coming decade.

One of the most difficult questions for the panel is how to reduce the budget deficit without threatening the fragile economic recovery.

Mr. Elmendorf said, “There is no inherent contradiction between using fiscal policy to support the economy today,” with tax cuts or additional spending, and “imposing fiscal restraint several years from now.”

However, Republicans were skeptical of that approach. Too often, they said, the additional spending, though labeled temporary, has become permanent, as with some provisions of the economic stimulus law adopted in 2009.

On one point lawmakers agreed on Tuesday.

“All problems are easier to solve with a strong, growing economy,” said Senator Patrick J. Toomey, Republican of Pennsylvania.

Senator John Kerry, Democrat of Massachusetts, said, “We need growth, not just revenue and not just cuts.”

Article source: http://feeds.nytimes.com/click.phdo?i=6e3e47cdb3c9782319105d99cb322770

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