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Congressional Budget Office: 'Daunting' Budget Problems

The Giant Noodle

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WASHINGTON (CNNMoney.com) -- Douglas Elmendorf, chief budget cruncher for Congress, got to play the role of bad-news bear before the president's bipartisan fiscal commission on Wednesday.
His job: Present the Congressional Budget Office's latest assessment of the long-term federal budget.



The gist of his testimony went something like this: The outlook is bad under current law and daunting if many current policies are extended as expected. And even that may understate the fiscal problem the country faces, because it doesn't factor in potential effects of debt on economic growth.
Under the rosiest scenario painted by Elmendorf, the debt held by the public is on track to rise to 80% in 2035 from 62% at the end of this year. At that point, interest payments on that debt would jump to 4% of GDP, up from roughly 1% today. That's the equivalent of a third of all federal revenue.
From there, the increases are stark under an alternative policy scenario, which includes an extension of the 2001 and 2003 tax cuts for most people, permanently protecting the middle class from the Alternative Minimum Tax and a permanent increase in Medicare payments to doctors.
Based on current policies, debt held by the public would hit 185% of GDP in 2035. And interest payments on that debt would jump to nearly 9% of GDP.

Focus on health spending: Spending on health care remains the federal budget's biggest problem, even after accounting for the estimated impact of the health reform law enacted in March.


CONTINUED: CBO chief to fiscal commission: Outlook is 'daunting' - Jun. 30, 2010
 
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donsutherland1

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The outlook is bad under current law and daunting if many current policies are extended as expected. And even that may understate the fiscal problem the country faces, because it doesn't factor in potential effects of debt on economic growth.
Unfortunately, the alternative scenario is probably more likely than the baseline one. For starters, the baseline scenario assumes that the 2001 and 2003 tax provisions would expire on schedule. That won't happen and cannot be permitted to happen for economic and political reasons, namely the impact of such a change would be too disruptive. On the health care front, even extremely modest savings provisions are routinely being waived e.g., the doctor's fix again overrode a modest saving mechanism. If the Congress lacks the appetite to enforce even modest provisions, that does not bode well for its allowing more stringent ones to be enforced. Hence, one cannot count on the baseline scenario being permitted to play out.
 

washunut

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WASHINGTON (CNNMoney.com) -- Douglas Elmendorf, chief budget cruncher for Congress, got to play the role of bad-news bear before the president's bipartisan fiscal commission on Wednesday.
His job: Present the Congressional Budget Office's latest assessment of the long-term federal budget.

[CENT


The gist of his testimony went something like this: The outlook is bad under current law and daunting if many current policies are extended as expected. And even that may understate the fiscal problem the country faces, because it doesn't factor in potential effects of debt on economic growth.
Under the rosiest scenario painted by Elmendorf, the debt held by the public is on track to rise to 80% in 2035 from 62% at the end of this year. At that point, interest payments on that debt would jump to 4% of GDP, up from roughly 1% today. That's the equivalent of a third of all federal revenue.
From there, the increases are stark under an alternative policy scenario, which includes an extension of the 2001 and 2003 tax cuts for most people, permanently protecting the middle class from the Alternative Minimum Tax and a permanent increase in Medicare payments to doctors.
Based on current policies, debt held by the public would hit 185% of GDP in 2035. And interest payments on that debt would jump to nearly 9% of GDP.

Focus on health spending: Spending on health care remains the federal budget's biggest problem, even after accounting for the estimated impact of the health reform law enacted in March.


CONTINUED: CBO chief to fiscal commission: Outlook is 'daunting' - Jun. 30, 2010
Would you please explain one statistic in the above. It states that current debt is 62% of GDP. My understanding is federal debt is about $13 trillion while our GDP is something about $15 trillion. This seems like more than 62%??
 

Lord Tammerlain

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Would you please explain one statistic in the above. It states that current debt is 62% of GDP. My understanding is federal debt is about $13 trillion while our GDP is something about $15 trillion. This seems like more than 62%??

Debt held by the public is the reason

It does not include debts held by other federal agencies like Social Security.

The $13 trillion number is the total debt of the federal government, including the debts to Social Security (ie the Trust Fund)
 

washunut

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Debt held by the public is the reason

It does not include debts held by other federal agencies like Social Security.

The $13 trillion number is the total debt of the federal government, including the debts to Social Security (ie the Trust Fund)
So if Social Security was allowed to put their money into higher interest corporate debt the Federal Debt would look more like 90%. This does not include the debt from Fannie and Freddie future losses which could be another few hundred billion, nor the unfunded future liabilites for Social security, medicare and the new HC entitlement.

If the U.S. was a private corporation it would be considered insolvent. Not sure most Americans understand the financial status of the country. As long as we are the reserve currency of the world we can just print our way out of the problem.
 

Lord Tammerlain

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So if Social Security was allowed to put their money into higher interest corporate debt the Federal Debt would look more like 90%. This does not include the debt from Fannie and Freddie future losses which could be another few hundred billion, nor the unfunded future liabilites for Social security, medicare and the new HC entitlement.

If the U.S. was a private corporation it would be considered insolvent. Not sure most Americans understand the financial status of the country. As long as we are the reserve currency of the world we can just print our way out of the problem.
Yes if SS was allowed to invest in higher interes corporate debt the Federal debt held by the public would be 90%.

No government debt figures include the debt from Fannie or Freddie so far. Only when loss's do materialize and the government has to pay out will those debt be put on the books.

From reports that I have seen if you include all unfunded liabilities of the Federal government (SS, Pensions, Medicare, etc) the federal debt would be above $40 trillion
 

donsutherland1

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Would you please explain one statistic in the above. It states that current debt is 62% of GDP. My understanding is federal debt is about $13 trillion while our GDP is something about $15 trillion. This seems like more than 62%??
That's federal debt held by the public. It's the lowest ratio and, in the context of historical experience with sovereign defaults, not a very meaningful one. It excludes intragovernment debt e.g., Treasury bills held by Social Security, which would ultimately need to be redeemed or sold for cash for the fund to meet its obligations. It excludes debt held by foreigners. It also excludes contingent liabilities. Gross public debt as a share of GDP is a more meaningful measure. But even that is just one measure.
 

oldreliable67

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washunut said:
As long as we are the reserve currency of the world we can just print our way out of the problem.
Close, but not exactly correct.

Actually, as long as the currency is a fiat currency, one can print as much money as is required, or one wishes or needs. Perhaps the best known examples of such being the Weimar Republic and Argentina.

Being the world's reserve currency is helpful in this regard, in that it broadens demand for one's currency for transaction purposes, but it isn't strictly necessary.
 

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Hmm I cant see any State debts or possible liabilities from State defaults in these numbers? Or are they just ignored because it is too painful to talk about?
 

oldreliable67

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Hmm I cant see any State debts or possible liabilities from State defaults in these numbers? Or are they just ignored because it is too painful to talk about?
I suspect Elmendorf didn't mention state liabilities because they are not part of his baliwick. Certainly, if he had they were included them in his presentation, the outlook would have been even cloudier, to wit:

IIRC, the unemployment insurance funds of 46 states are now empty, and those states are relying on loans from a federal gov't contingency fund to meet their obligations. Of course, the scary state of their huge unfunded pension liabilities is well-known. Moreover, haven't looked in a month or two, but when I last looked, aggregate state tax receipts were still heading down, with only a minor improvement here and there. Furthermore, the amounts in the stimulus targeted for assistance to states is largely depleted, and the mood in congress makes replenishment problematic (administration wants it as part of additional stimulus, congress reluctant and will have to be convinced of the need).
 

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I suspect Elmendorf didn't mention state liabilities because they are not part of his baliwick. Certainly, if he had they were included them in his presentation, the outlook would have been even cloudier, to wit:

IIRC, the unemployment insurance funds of 46 states are now empty, and those states are relying on loans from a federal gov't contingency fund to meet their obligations. Of course, the scary state of their huge unfunded pension liabilities is well-known. Moreover, haven't looked in a month or two, but when I last looked, aggregate state tax receipts were still heading down, with only a minor improvement here and there. Furthermore, the amounts in the stimulus targeted for assistance to states is largely depleted, and the mood in congress makes replenishment problematic (administration wants it as part of additional stimulus, congress reluctant and will have to be convinced of the need).
That is what I mean some what. In Europe local government cant build up such debts and liabilities, as it all goes over the state. Hence to make an even remote comparison to Europe, the statistics should include the US state debts and liabilities on all fronts. And if you add those, then I must say it looks rosy over here in "socialist" Europe lol.

But seriously why does the economic minds not talk about this albatross of a problem? I mean if a state went belly up it would be the fed and the other states that would come running to its aid after all.. else what is the point of the union. And considering that most states are in the hole, and some in a huge hole, and add to that the pension liabilities and what not, the debt vs GDP of some states rivial that of European countries.. I believe Alaska has a debt vs GDP of over 70%.

But I got to love how the article yet again blames healthcare and leaves out the massive military/security budget... like it or not, the US has reached a bend in the road... talk about all aspects of government spending at all levels and tax rises or go bankrupt.
 

oldreliable67

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PeteEU said:
In Europe local government cant build up such debts and liabilities, as it all goes over the state.
U.S. state constitutions prohibit them from deficit spending; they are required to balance their budgets by law. That doesn't prohibit them or limit them from borrowing to do so. Part of that borrowing - as well as direct funding for certain federally mandated programs - can and typically does come from the federal gov't, especially during times of economic stress. Consequently, we don't include borrowings by states which were incurred for their own programs on the federal budget, but we do include those for federally mandated programs implemented by the states or emergency/stimulus lending.
 

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U.S. state constitutions prohibit them from deficit spending; they are required to balance their budgets by law.
Which few do atm.

That doesn't prohibit them or limit them from borrowing to do so. Part of that borrowing - as well as direct funding for certain federally mandated programs - can and typically does come from the federal gov't, especially during times of economic stress. Consequently, we don't include borrowings by states which were incurred for their own programs on the federal budget, but we do include those for federally mandated programs implemented by the states or emergency/stimulus lending.
Yes, but that still does not address the liabilities in their pension systems, which are a huge portion of their outstanding liabilities/debt.
 

oldreliable67

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PeteEU said:
Yes, but that still does not address the liabilities in their pension systems, which are a huge portion of their outstanding liabilities/debt.
Quite true. But lets not conflate budgeting with forecasting. IIRC, there is an adjustment made to the balance sheets of state and local municipalities for near-term unfunded liabilities. I don't recall/am unsure of the time frame that is included in the reserve account, but I vaguely recall that it is a max of 5 years. State and local governments are predominately on cash basis accounting, so there are no accruals as such, but there are certain typical reserve accounts, of which this is one. Note: Been some years since I dealt with the accounting side of this, so I am unfortunately not as up on it as I once was, so if I get something wrong here, anyone that knows better: please provide corrections!

Unfunded portions/liabilities are estimates based on varying assumptions by various actuaries, with little if any uniformity from state to state, locality to locality. Those assumptions include not only mortality rates of pensioners and potential pensioners but long-term holding period returns/earnings rates as well. These assumptions can and typically do change from year to year. Actuarial reports are prepared at least annually and submitted to the Labor Dept, thus becoming a matter of public record, where they can be accessed and studied by any interested party (e.g., at freeERISA.com).

These actuarial reports and their underlying assumptions are prepared at least annually. Plans are then scrutinized and categorized by the Labor Dept according to the amount by which they are determined to be under-funded or in an otherwise precarious financial position. Paraphrasing from Wiki, the categories are "endangered", "seriously endangered", or "critical". Restrictions accompany each deficient funding category and are progressively more severe as funding status worsens.

Likewise, neither does the federal budget include estimated amounts for social security or other entitlement claims for the "out" years. However, estimates/forecasts are prepared regularly, in keeping with the forecaster's credo: "If you must forecast, you must forecast frequently." But that is not the same thing as budgeting.
 
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