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CBO’s Budget Outlook Further Confirms Tough Choices Lie Ahead January 27, 2010

Posted by Rebecca Williams in Analysis.
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by Gordon Adams and Rebecca Williams

As President Obama prepares for his State of the Union address this evening, the Congressional Budget Office (CBO) has released its most recent analysis of the outlook for the budget and the economy.  With unemployment still hovering around 10 percent in most US cities, one can almost hear the collective groan as the CBO’s economic forecast predicts that “economic growth will probably remain muted for the next few years.”  CBO also expects that the FY 2010 federal budget deficit would reach to $1.3 trillion (9.2 percent of GDP).[1] Constrained revenues and a growing national deficit will put a squeeze on discretionary spending in the upcoming fiscal year, resulting in tough choices all around for government planners.

In fact, the Washington Post reported yesterday that President Obama will propose in his State of the Union address a three-year freeze on federal spending that is not related to national security.  The freeze will exclude the military, international affairs programs, homeland security, and veterans programs, all presumably in the “security” sector of government activity.  Because they cannot do otherwise without changes in law, the proposed freeze would also leave out entitlement programs, (social security, Medicare and Medicaid), and interest payments on the federal debt.  It will hit the operating budgets of most domestic federal agencies, hard, as a result.

Although security spending seems excluded, if deficit reduction re-emerges as a political priority, there can only be major downstream consequences for national security spending, especially from the President’s own party.

For instance, the administration is said to be seeking a $708 billion FY2011 defense budget request next week.  It will encounter real opposition from some Democratic Members of Congress who understand the President’s desire to be strong on national security but fundamentally disagree on how he plans to do that.

Moreover, while the proposed overall International Affairs budget may go up – some say as much as 11 percent – it seems that State budgets for people and operations will be treated more like other domestic agencies, with a largely frozen budget request.  Secretary Clinton stated at Town Hall meeting on January 26 that, “I think you know that we’re facing very tough budgetary times. It’s anticipated that tomorrow the President will announce in the State of the Union a request for a three-year freeze on domestic spending. Thus far, he’s exempted foreign aid, but not State operations.”  Moreover, the appropriations committees in the Congress are likely to look at the significant growth proposed for foreign assistance and see it as a funding source for domestic programs that are being frozen.   In the worst of all worlds, foreign assistance (especially for Iraq, Afghanistan and Pakistan) could go up, while the staff State and USAID need to administer the programs do not keep pace.

The Congress has rejected a proposal to create a budget commission that could help untangle this budgetary conundrum.  The President will probably propose a commission created under an executive order, but it is unlikely to have a compelling impact on a reluctant Congress, unprepared to increase taxes in and election year and anxious to ensure adequate domestic spending for the same reason.  The end result could be further pressure on national security spending.

CBO’s long-term forecast is not promising.  Extending tax cuts, protecting the middle class from the Alternate Minimum Tax, domestic discretionary spending that tracks GDP (as opposed to just growing with inflation), or war costs that exceed a small, mechanical projection (likely) will all make the problem considerably worse.  These likely events could raise debt service from just over $200 billion a year to more than $720 billion by FY 2020.  As CBO says, “to keep federal deficits and debt from reaching levels that would substantially harm the economy, lawmakers would have to significantly increase revenues, decrease projected spending, or enact some combination of the two.”

If the preceding deficit reduction efforts (Gramm-Rudman-Hollings and the Budget Enforcement Act) are any guide, national security spending will not be exempt from budget discipline for long.  And such discipline seems increasingly on the way.


[1] It is important to note CBO’s current-law parameters, as changes in any one of these assumptions would alter the economic forecast.  For example, temporary changes that have kept tax cuts from expiring are not considered.  Baseline projections also assume that annual appropriations only rise with inflation; CBO does not consider legislation that is not yet law.  Furthermore, if the recession becomes a double-dip recession, GDP, interest rates, and other basic factors would change.

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