The Congressional Budget Office (CBO) said in its budget and economic outlook report released Wednesday that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8% of GDP, in 2011. Economic growth this year, the CBO said, will remain "moderate."
The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 when measured as a share of GDP, are the largest since 1945—representing 10% and 8.9%, respectively, of the nation's output, CBO said.
Sharply lower revenues for the federal government along with "elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years," CBO said in its report.
The nation faces "daunting economic and budgetary challenges," and the economy has struggled to recover from the recent recession, which was triggered by a large decline in housing prices and the financial crisis, CBO continued.
Although recent actions by U.S. policymakers should help support further gains in real (inflation-adjusted) GDP in 2011, CBO said, "production and employment are likely to stay well below the economy's potential for a number of years." CBO projects that inflation will remain "very low in 2011 and 2012, reflecting the large amount of unused resources in the economy, and will average no more than 2.0% a year between 2013 and 2016."
As for unemployment, CBO estimates that as the recovery continues, the economy will add roughly 2.5 million jobs per year over the 2011–2016 period. However, "even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time," CBO said.
CBO said that it projects that the unemployment rate will gradually fall in the near term, to 9.2% in the fourth quarter of 2011, 8.2% in the fourth quarter of 2012, and 7.4% at the end of 2013. Only by 2016, in CBO's forecast, does it reach 5.3%, close to the agency's estimate of the natural rate of unemployment—which is the rate of unemployment arising from all sources except fluctuations in aggregate demand, which CBO now estimates to be 5.2%.
Beyond its 10-year projection period, CBO went on to conclude that "further increases in federal debt relative to the nation's output almost certainly lie ahead if current policies remain in place." The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades, CBO said. Specifically, "spending on the government's major mandatory health care programs— Medicare, Medicaid, the Children's Health Insurance Program, and health insurance subsidies to be provided through insurance exchanges—along with Social Security will increase from roughly 10% of GDP in 2011 to about 16% over the next 25 years."
Rep. Paul Ryan, D-Wis., chairman of the House Budget Committee, aired during the official Republican response to President Obama's State of the Union speech on Tuesday evening, his intention is to privatize Social Security and Medicare.
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