Tags: Budget | Watchdog | Warns | Lawmakers | Taxes | Spending

Congress Warned on Lower Taxes, Higher Spending

Tuesday, 28 Sep 2010 03:07 PM

Stimulating the U.S. economy by increasing spending or renewing expiring income tax cuts would provide a short-term economic boost, but end up being a drain on long-term growth, the chief congressional budget analyst warned Tuesday.

Congressional Budget Office Director Douglas Elmendorf said increasing government borrowing to boost spending or to extend the tax cuts enacted under former President George W. Bush, which are set to expire at the end of the year, would provide a short-term boost but result in lower levels of growth and national income by 2020.

"If taxes were cut permanently, or government spending increased permanently and no other changes were made to fiscal policy, the federal budget would be on an unsustainable path, and the economy would suffer," Elmendorf told the Senate Budget Committee Tuesday.

"Even if tax cuts or spending increases were temporary, the additional debt accumulated during that temporary period would weigh on the economy over time," he added. Government borrowing as the economy improves will crowd out private borrowers and lead to higher interest rates, he said.

It is a message that CBO analysts have delivered in reports to Congress over the past several months.

But Elmendorf's testimony served as a reminder to lawmakers of the long-term economic consequences of huge budget deficits as they debate how to boost economic growth and debate a broad range of income tax cuts that expire at the end of the year.

It also comes a day before President Barack Obama's deficit commission meets again to mull ways to get the country's fiscal health on a sustainable path. Its recommendations are due in December.

The U.S. deficit stands at about $1.3 trillion this year, while the national debt has topped $13 trillion. Analysts worry the debt will double over a decade if nothing is done to slow the flow of red ink.

Senate Democratic leaders have delayed debate on the tax cut issue until after the Nov. 2 congressional elections when Republicans hope to make substantial gains in their quest to retake control of Congress.

House Democratic leaders have said they have not decided whether to hold a tax vote this week before Congress goes into recess for a final month of campaigning. With time running out, it is unlikely the House will take it up.

Elmendorf said lawmakers could push economic stimulus policies in the short term without hurting long-term growth prospects by tackling the deficit once the economy recovers.

"If policymakers wanted to achieve both short-term stimulus and medium- and long-term sustainability, a combination of policies would be required -- changes in taxes and spending that would widen the deficit now, but reduce it relative to baseline projections after a few years," he said.

Obama administration officials have said moving too soon to reduce deficits could hurt the fragile recovery. They are arguing for increasing deficits in the short term and intend to focus on deficit reduction once the recovery firmly takes hold. But voters are nervous about running up huge deficits and it has become an issue in this election year.

On taxes, Elmendorf told the panel that overhauling the tax code to reduce the number of deductions, credits and preferences could help raise revenues without raising overall tax rates.

"I think there would be widespread agreement among analysts that a tax system with a broader base and lower tax rates would be a much more efficient way to raise revenue, thus a better way to strengthen the economy while raising revenue," Elmendorf said.

© 2017 Thomson/Reuters. All rights reserved.

 
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Stimulating the U.S. economy by increasing spending or renewing expiring income tax cuts would provide a short-term economic boost, but end up being a drain on long-term growth, the chief congressional budget analyst warned Tuesday. Congressional Budget Office Director...
Budget,Watchdog,Warns,Lawmakers,Taxes,Spending
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2010-07-28
Tuesday, 28 Sep 2010 03:07 PM
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