CBO Projects $1.1 Trillion Budget Deficit for 2012 if Laws Don’t Change

Nonpartisan budget office also predicts a rise in the unemployment rate to 8.9% from current 8.5%

With substantial changes to U.S. tax and spending policies slated to take effect within the next year, the Congressional Budget Office on Tuesday released a new budget that projects a $1.1 trillion federal budget deficit for fiscal year 2012 if current laws remain unchanged.

The nonpartisan CBO also predicts a rise in the unemployment rate to 8.9% from the current 8.5%.

That shortfall of 7% is nearly 2 percentage points below the deficit recorded in 2011, but still higher than any deficit between 1947 and 2008, the CBO reported. The $1.1 trillion deficit in 2012 would be the fourth consecutive year that the federal deficit exceeds $1 trillion.

And, the CBO warned, tax increases and spending cuts scheduled to go into place next year will slow the economy and increase unemployment if lawmakers in Washington don’t strike a deal to make policy changes.

“The decisions made by lawmakers as they confront those policy choices will have a significant impact on budget outcomes in the coming years,” said the CBO in its 10-year budget and economic outlook, published annually in January.

CBO Director Douglas Elmendorf (Photo: AP)CBO Director Douglas Elmendorf (left) said Tuesday in a blog post that because so many tax and spending changes to are slated to take effect, CBO has also prepared projections under an “alternative fiscal scenario.”

Under this scenario, policies are assumed to continue in effect even though, by law, they are scheduled to change. Democrats and Republicans have been warring over issues such as expiring tax provisions, Medicare payment rates and automatic spending reductions.

“Under that alternative fiscal scenario, far larger deficits and much greater debt would result than are shown in CBO’s baseline,” Elmendorf wrote. “Deficits would average 5.4% of GDP over the 2013–2022 period, rather than the 1.5% reflected in CBO’s baseline projections. Debt held by the public would climb to 94% of GDP in 2022, the highest figure since just after World War II.”

Looking at the nation’s current baseline tax picture, the CBO’s projection shows that much of the decline in the deficit would occur because tax revenues are projected to shoot up by almost $800 billion, or more than 30%, between 2012 and 2014, from 16.3% of GDP in 2012 to 20% in 2014. That increase is mostly the result of expirations of tax provisions that lower income tax rates and that limit the number of people subject to the alternative minimum tax.

As for spending, the CBO foresees outlays declining modestly relative to GDP due to an expanding economy and statutory caps on discretionary appropriations. However, the aging of the population and rising costs for health care will increase in U.S. spending in later years if laws remain unchanged.

Read Raising Age for Social Security, Medicare Would Cut Both Ways: CBO at AdvisorOne.com


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