CBO Warns of "Sudden Fiscal Crisis"

WASHINGTON (AP) — A new report says that the national debt is on pace to equal the annual size of the economy within a decade, levels that could provoke a European-style debt crisis unless policymakers in Washington can slam the brakes on spiraling deficits.
The Congressional Budget Office study released Wednesday offers a fresh reminder of what’s at stake in ongoing talks led by Vice President Joe Biden that are aimed at slashing more than $2 trillion from the federal deficit over the coming decade as the price for permitting the government to take on more debt to pay current obligations.
CBO says the nation’s rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax hikes.
“As Congress debates the president’s request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff – a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic,” said House Budget Committee Chairman Paul Ryan, R-Wis.
The findings aren’t dramatically new, but the CBO analysis underscores the magnitude of the nation’s fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid.
With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP – the record set in World War II – by 2023.
Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government’s ability to respond to unexpected challenges like an economic downturn.
But most ominously, the CBO report warns of a “sudden fiscal crisis” in which investors would lose faith in the U.S. government’s ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, CBO warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.
“Earlier action would permit smaller or more gradual changes and would give people more time to adjust to them, but it would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations,” CBO Director Douglas Elmendorf said in a blog post.

CBO Predicts Debt Crisis for USA

(CNSNews.com) – The Congressional Budget Office is warning that unless the federal government can control its appetite for deficit spending, the accumulated national debt could spark a fiscal crisis similar to those experienced by Greece and Ireland earlier this year.

The non-partisan congressional accounting office – in a little-noticed July report – said the combination of a massive national debt and another fiscal downturn could spark the debt crisis.

“Combined with an unfavorable long-term budget outlook, it would increase the probability of a fiscal crisis for the United States,” CBO said. “In such a crisis, investors become unwilling to finance all of a government’s borrowing needs unless they are compensated with very high interest rates.”

In such a scenario, borrowing becomes prohibitively expensive for the government because the interest rates and repayment schedules demanded by mistrustful investors force the government to devote too much of its budget to servicing the debt. This poor fiscal situation can spiral out of control, CBO explained, because the government would need to borrow more money – at even less favorable terms – to continue functioning.

CBO admitted that, just as with the Greek and Irish debt crises of 2009-2010, there is no exact way to predict when a country will experience a debt crisis. However, as a general rule, the more debt a country has, the greater the chance of a crisis.

“Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States; in particular, there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis.”

Such a crisis would most likely occur during another period of economic recession, particularly if the government decides to enact another large, deficit-financed spending package.

“Fiscal crises around the world have often begun during recessions and, in turn, have often exacerbated them. Frequently, such a crisis was triggered by news that a government would, for any number of reasons, need to borrow an unexpectedly large amount of money,” CBO said.

A debt crisis would then make a recession worse, since the already high levels of debt would make stimulus spending nearly impossible, since the borrowing required to provide the stimulus would be too expensive.

Conversely, the government would find it extremely difficult to raise enough taxes to reassure investors during a recession because doing so would drain what little money was being spent in the private sector, thereby driving the economy further into recession.

CBO acknowledged that Greece and Ireland are not perfect examples, since the U.S. might be able to take on more debt than other countries because of the sheer size and diversity of its economy.

However, CBO warned that the low savings rate of most Americans could mean that the U.S. would suffer a debt crisis sooner, because a low savings rate would restrict the ability of the government to raise taxes.

“On the one hand, the United States may be able to issue more debt (relative to output) than the governments of other countries can, without triggering a crisis, because the United States has often been viewed as a ‘safe haven’ by investors around the world, and the U.S. government’s securities have often been viewed as being among the safest investments in the world.

“On the other hand, the United States may not be able to issue as much debt as the governments of other countries can because the private saving rate has been lower in the United States than in most developed countries, and a significant share of U.S. debt has been sold to foreign investors,” CBO explained.

Regardless of when the debt crisis occurs, CBO said, the government would face several difficult choices in order to get out of it. Two of those choices – restructuring or defaulting and printing money – would result in serious, long-term negative consequences for the U.S.

Restructuring U.S. debt would make borrowing extremely difficult for years or decades because investors both foreign and domestic would not view the government as credible.

Printing money would, in CBO’s estimation, also be a poor decision because while it would make the current national debt smaller – due to the devalued dollar – it would also make future borrowing harder; this time due to the fact that printing money would increase future deficits.

The third – an austerity program of some kind – would also have negative consequences but is the only option that could potentially prevent a fiscal crisis from happening at all. Even if an austerity program were adopted during a debt crisis, the downsides would not be as sever when compared to the other two options.

“The later thatactions are taken to address persistent budget imbalances, the more severe they will have to be,” CBO said. “Actions taken later, particularly if there was a fiscal crisis, would need to be significantly greater to achieve that same objective. Larger and more abrupt changes in fiscal policy, such as substantial cuts in government benefit programs, would be more difficult for people to adjust to than smaller and more gradual changes.”

CBO Releases Dour Economic Forecast

WASHINGTON (Reuters) - The economy faces even more difficult times ahead with chronic unemployment and slow manufacturing hurting the recovery, the head of Congress' budget agency said on Thursday.
The warning from the non-partisan Congressional Budget Office came on top of more bad economic data that heightened concerns about a return to recession and sent markets roiling. It could also spell trouble for Democrats facing November elections.
The CBO forecast the U.S. budget deficit will hit $1.342 trillion this year, down slightly from its March projection of $1.368 trillion.
It attributed most of the $27 billion change in its fiscal 2010 deficit projection to an estimated $50 billion reduction in the cost of TARP, the U.S. government's bailout of financial institutions in 2009.
But the figures show that without significant changes in U.S. tax and spending laws, the government will struggle to dig its way out of a deep fiscal deficit hole.
Congressional Budget Office Director Douglas Elmendorf painted a picture of a tough recovery from recession, although the CBO predicted a 3 percent economic growth rate this year.
"The considerable number of vacant houses and underused factories and offices will be a continuing drag on residential construction and business investment, and slow income growth as well as lost wealth will restrain consumer spending," he said.
The unemployment rate will not fall to around 5 percent until 2014, Elmendorf said. The last time the jobless rate was 5 percent was April 2008, just as the economy was heading into recession and unemployment was on the rise.
BAD FOR DEMOCRATS
Anxiety over the economy is likely to punish President Barack Obama's Democrats at November's midterm elections because of perceptions of big deficits caused by government spending and high unemployment.
Republican Senator Judd Gregg warned of fiscal calamity.
"Today's CBO outlook only underscores what we already know -- the current pace of U.S. spending is unaffordable and unsustainable and without a change in direction this country is headed for fiscal calamity," said Gregg, the senior Republican on the Senate Budget Committee.
As if to illustrate the severity of the economic challenge ahead, the CBO forecast was released as new data dealt another blow to the fragile U.S. economy, driving prices on U.S. government debt higher and yields lower.
The benchmark 10-year Treasury note yield fell to a 17-month low of 2.56 percent this week.
Concerns about the massive deficit, and the U.S. triple-A credit rating, are not expected to lift Treasury debt yields from current low levels any time soon.
"We think bond yields are going lower, mostly on revised growth expectations -- all the shops are revising down their forecasts for inflation and growth," said Sergey Bondarchuk, U.S. interest rate strategist with BNP Paribas in New York.
CHRONIC UNEMPLOYMENT
The budget and economic outlook are designed to give lawmakers the most up-to-date nonpartisan assessment of U.S. economic health and provide the latest projections on deficits that began in 2002 under former President George W. Bush and then skyrocketed in 2009 during recession and stimulus spending under Obama.
The CBO's deficit numbers are slightly lower than recent White House predictions for the fiscal gap, but the two use different measurements.
Members of Congress will rely on the CBO numbers as they decide how to tackle the yawning budget gap.
The CBO projected a 9.5 percent jobless rate for this year, falling only slightly to 9 percent in 2011 and averaging 6.7 percent in 2012-2014, significantly shy of the 4 percent target economists would consider a full employment level.
Last month, the White House said unemployment will decline slowly, to 8.1 percent in 2012, when the U.S. presidential election will be held.
Democrats blame Bush for the budget deficit and say Republicans are blocking efforts in Congress to fight unemployment and help small business.
"Republicans bear much of the responsibility for wiping out the surpluses they inherited in 2001 and creating these deficits," said Thomas Kahn, Democratic staff director of the House of Representatives' Budget Committee.
"And what's their solution now? Almost $4 trillion dollars in new tax cuts largely benefiting the most privileged. That would just dig the deficit hole even deeper," Kahn added, referring to Republican tax cut plans.
An independent, bipartisan commission is studying possible fixes to the budget and economic dilemma but is not due to report to Obama until December.
CBO also forecast a $1.066 trillion deficit for fiscal year 2011, which begins on October 1, up slightly from the March estimate of $996 billion.
The U.S. budget deficit last year was a record $1.413 trillion, 9.9 percent of gross domestic product.