The Congressional Budget Office just released its new budget deficit estimates. Itís a grim read, showing the likelihood of another $1 trillion deficit next year, the fourth in a row, and federal spending still unrestrained.
Relative to its March report, the CBO lowered its deficit estimate for fiscal 2011 (which ends Sept. 30) to $1.3 trillion. However, that was mostly due to individual income taxes coming in faster than expected, not spending cuts.
The deficit is running 8.5 percent of the gross domestic product, increasing the debt-to-GDP ratio to 67 percent by September. Thatís nosebleed territory, putting the United States in as precarious a fiscal condition as the southern European punching bags.
For next fiscal year, the CBO is showing a $973 billion deficit, 6.2 percent of GDP, but thatís wishful thinking. Itís based on very rosy assumptions and at least $36 billion in extra tax receipts that wonít materialize.
For example, the CBO is assuming Washington lets the alternative minimum tax jump much higher in January bringing in a quick $11 billion in new taxes by September. And then the CBO assumes a whopping $4.5 trillion in additional revenues from increased AMT taxes over the next nine years all without slowing growth even a smidgen.
In reality, Washington is set to run gigantic deficits for as far as politicians can see. Thereís been no progress on fiscal restraint and little is likely under the current legislative and executive branch rules. Congress should have used the debt limit increase to put realistic procedural restraints on spending growth ó deficit reduction committees and sequesters havenít worked in the past and probably wonít this time.
The CBO tried to factor in the results from this yearís knock-down, drag-out Congressional battles over spending. Recall the threat of a government shutdown in April and a default in August. However, the CBO found very little actual spending restraint. The two budget deals actually increased fiscal 2011 spending by $3 billion and reduced spending by only $21 billion in fiscal 2012 (mostly from the discretionary spending freeze).
There will be a few more opportunities for fiscal restraint, but I donít think theyíll be any more successful than the ones in 2011.
By Oct. 1 Congress will be renewing the continuing resolution that funds the government. But the Obama administration will threaten a government shutdown again unless it gets business as usual ó meaning no program terminations, no layoffs, no reductions in government activities, no asset sales and no true cuts.
All members of the House are up for election in November 2012, so the big majority will probably want to avoid an unpopular government shutdown. Theyíll get minor spending cuts and then work on their campaigns.
The super committeeís output is due in November. The CBO doesnít assume it can make any cuts. The panel might get a few done but not enough to move the spending needle back much. This just kicks the can down the road.
Its goal is to get $1.2 trillion to $1.5 trillion in cuts, but the fallback is an across-the-board spending cut starting in 2013. Itís cleverly timed to come after the elections so Congress can rethink any downsizing. And it is set up to hit defense and Medicare spending particularly hard, making it difficult for Congress to let it proceed.
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