CBO warns super committee on deficit reduction timing
Doug Elmendorf, the director of the Congressional Budget Office, warned the newly formed deficit reduction committee Tuesday that if it elects to cut spending or raise taxes too quickly, the still struggling economy could be slowed even further.
Congress formed the so-called "super committee" to find at least $1.5 trillion in deficit reductions over the next 10 years in exchange for raising the debt ceiling this summer. Members are charged with finding either enough spending cuts, new revenues or a combination of both before triggering roughly $1.2 trillion in more immediate spending cuts if a deal is not reached by the end of the year.
The committee met Tuesday for the first time. While some on the committee stuck to preconceived stances such as refusing to raise taxes or cut certain entitlements, others urged members to find some common ground and make deep, long-term changes to reduce the $14.6 trillion in U.S. debt.
The timing, however, could prove tricky. Since early July, economic growth for the rest of 2011 will likely be weaker than previously anticipated. According to the CBO revision, growth may fall to roughly 1.5% this year and 2.5% in 2012.
"If economic growth occurs at the slow pace that CBO anticipates, a large portion of the economic and human costs of the recession and slow recovery remains ahead," Elmendorf said in testimony.
Between late 2007 and mid-2011, the difference between GDP and estimated potential GDP totaled roughly $2.5 trillion, Elmendorf said, adding that by the time the country's output rises back to its potential level, which may take several years, the shortfall could reach about $5 trillion.
"Not only are the costs associated with the output gap immense, but they are also borne unevenly, falling disproportionately on people who lose their jobs, who are displaced from their homes, or who own businesses that fail," Elmendorf said.
He said cutting spending or increasing taxes over time could lead to more growth in the debt, while more abrupt cuts or raises would give people, businesses and governments little time to adjust.
"In addition, and particularly important given the cur- rent state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion," Elmendorf said.
Elmendorf added: "In our analysis, to provide the greatest boost to the economy now would be to cut taxes or increase spending in the immediate term, then in longer term cut spending or increase taxes."
What wasn't up for debate during the committee hearing was the scale of the problem. In June 2011, the U.S. public debt was projected to reach 84% of GDP in 2035 under current law.
If provisions of the 2010 tax act are extended, then, in order to reduce the debt to 61% of GDP by 2021, the committee would have to find $6.2 trillion of deficit reduction over the next 10 years, Elmendorf said, not the $1.5 trillion targeted.
Write to Jon Prior.
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