Economic Outlook Shows Challenges, Opportunities

The non-partisan Congressional Budget Office (CBO) just released a midyear update of its Budget and Economic Outlook, and the results are educational. Amid the grim economic news are glimpses of the progress that is possible when Washington get its act together and cuts spending.

The spending reductions Republicans succeeded in passing during the debt ceiling debate are just a down payment on the significant cuts necessary to balance the budget, but they are beginning to make a difference in the deficit. The new projections indicate that deficits will fall from 8.5 to 6.2 percent of GDP next year, will drop further to 3.2 percent in 2013, and are expected to average 1.2 percent of GDP from 2014 to 2021. Cumulative deficits between 2012 and 2021 total $3.5 trillion, but the good news is that this estimate "is considerably lower than the $6.7 trillion that the agency projected in March." CBO's report credits the debt ceiling agreement as the source of the improvement, stating that "about two-thirds of that reduction stems from the effects of enacting the Budget Control Act. "

However, the encouraging news ends there. The remainder of the report is a catalogue of the "profound budgetary and economic challenges" we face. One of the most troubling aspects of the assessment is the projected unemployment rate. CBO estimates that the jobless rate should fall slightly from 9.1 to 8.9 percent later this year. Unfortunately, unemployment is expected to remain as high as 8.5 percent by the fourth quarter of 2012 and still be stuck above 8 percent by 2014.

Throughout the report, CBO analysts emphasize the correlation between legislative policies and the debt. Sobering alternative forecasts demonstrate the dismal economic reality we will face if Congress does not follow through on spending reforms. Under one legislative scenario, CBO projects cumulative deficits of nearly $8.5 trillion and publically held debt equal to 82 percent of GDP, as opposed to current estimates of $3.5 trillion and 61 percent, respectively -- which are already daunting enough.

CBO analysts conclude the report summary with the following warning: "To prevent debt from becoming unsupportable, policymakers will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches."

House Republicans have made it clear that only one of those approaches is acceptable. The debt crisis was created by reckless spending, and it will be solved by responsible spending cuts and entitlement reforms.