The U.S. needs to cut its budget deficit soon through changes in spending and tax policies to reduce the risk of a fiscal crisis, according to the head of the nonpartisan Congressional Budget Office.
Changes to U.S. fiscal policy “need to be large, need to affect programs that are popular and tax payments that people make, and it will need to be enacted fairly soon,” Douglas Elmendorf, director of the congressional office that estimates the impact of legislation on the federal budget, said today.
Elmendorf joins economists and policy makers such as Federal Reserve Chairman Ben S. Bernanke in warning about risks to the economy from annual budget deficits running at near 10 percent of gross domestic product for the third year in a row.
“If we do not change our course we will let our past crush our future in a very fundamental budgetary sense,” said Douglas Holtz-Eakin, a former CBO director who was chief economic adviser to Republican Senator John McCain during the 2008 presidential campaign. He is president of American Action Forum, a policy research group in Washington.
Elmendorf and Holtz-Eakin spoke during a panel discussion at the Allied Social Science Associations’ annual meeting in Denver.
Republicans have pledged to reduce a budget deficit that may widen to $1.34 trillion for fiscal 2011, Credit Suisse Group AG strategists estimated on Dec. 7, a day after the president announced a deal with Republicans extending Bush-era tax rates. The shortfalls were $1.29 trillion in fiscal 2010 and $1.42 trillion in fiscal 2009.
“The longer we delay, the larger the reduction in future incomes will be,” Elmendorf said. Without action, “there would be a greatly increased risk of a fiscal crisis.”
Elmendorf warned of rising budget pressures from an aging population. “With the baby boomers retiring and the higher rate of growth in health spending applying to a larger share of the budget, the pressures to the spending side will mount,” he said.
In testimony before the Senate Budget Committee on Jan. 7, Bernanke said steps to address the long-term budget deficit could help the economic recovery now.
“The prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence,” Bernanke said.
Elmendorf said the long-term changes needed to stabilize the government’s debt position shouldn’t be enacted suddenly.
“Changes of this magnitude would be disruptive, so you need to implement it gradually” to give people and businesses time to plan, he said.
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