Image: Congressional Budget Office Releases Budget Forecast For FY 2011-2021
Chip Somodevilla  /  Getty Images
Conressional Budget Office director Douglas Elmendorf talks to reporters after the release of the budget outlook Wednesday.
By Tom Curry National affairs writer
msnbc.com
updated 1/27/2011 11:08:12 AM ET 2011-01-27T16:08:12

The big headline number from Wednesday’s Congressional Budget Office report is a jolting shot of bad news: a budget deficit this fiscal year of close to $1.5 trillion, or 9.8 percent of gross domestic product (GDP).

That’s nearly as big as 2009’s shortfall, which was the highest in nearly 65 years. The $1.5 trillion deficit would be a nominal record, but not quite as big as the 2009 deficit when measured as a percentage of the economy.

Story: CBO: U.S. budget deficit to hit $1.5 trillion

More bad news: CBO’s forecasters don’t see employment returning to anything like normal before 2016.

Look inside the 190-page report and you’ll find facts, figures and forecasts that could help Republicans make their case that deficits and debt must be cut now. But you’ll also find other data that can aid President Barack Obama and Democrats in making their budgetary arguments — especially on the fiscal rationale for not repealing the health care law.

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Wednesday’s report carries political weight. Even though congressional Republicans have heaped abuse on the CBO for reporting last year that the health care bill that Obama signed into law would reduce the deficit, CBO still remains the neutral, professional budget scorekeeper. It sets the terms of the debate.

Chart: Interactive: U.S. budget deficits continues to soar

Arguments for cutting spending and debt
For Republicans, the CBO report supplies powerful arguments for cutting spending and reducing debt.

The CBO’s new estimate of the deficit for 2011 is $414 billion larger than the one the office produced last August.

The new report uses the word “unsustainable” to describe deficits and debt in the years ahead.

It warns that interest rates — which it says are “very low by historical standards” right now — will go up and will drive up the cost of paying off the debt. Interest payments on the debt “are expected to skyrocket.” CBO projects that the government’s yearly net interest spending will more than triple between 2011 and 2021.

Video: McConnell: Obama’s spending cut proposal ‘inadequate’ (on this page)

As if that weren’t frightening enough, the CBO warns in unusually stark language — as it has before — of the potential for a sovereign debt crisis. The report uses the words “Greece” and “Ireland” only once but it spells out a scary scenario in detail.

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Risk of 'a sudden fiscal crisis'
The growing debt, it says, “would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.”

Interactive: Interactive: Proposals for cutting the debt

It warns that “as other countries’ experiences show, investors can lose confidence abruptly and interest rates on government debt can rise sharply and unexpectedly. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory. ... There is no way to predict with any confidence whether and when such a crisis might occur and no identifiable tipping point of debt relative to GDP.”

Video: Obama to Congress: Let's 'move forward' together (on this page)

With that kind of risk being discussed by somber, nonpartisan numbers crunchers, Senate Republican Leader Mitch McConnell’s response to Obama’s State of the Union speech sounds more compelling. Obama’s call for a freeze on some types of federal spending falls way short, McConnell said.

“To freeze spending at this astronomically high level that we’ve achieved over the last two years really is totally inadequate.” McConnell said on MSNBC Wednesday morning.

Why taxes must go up
But then there’s data in the report that give Democrats ammunition for arguing that the tax increases that Obama called for Tuesday night on upper-income Americans must be part of any deficit solution.

“To keep annual deficits and total federal debt from becoming unsustainable, lawmakers will need to increase revenues as a percentage of GDP significantly above historical levels, sharply decrease projected spending, or pursue some combination of the two approaches,” the budget office said.

It’s not the CBO’s job to recommend what combination of spending cuts and tax increases would do the job — but it does imply that tax increases are inevitable.

Due to so many Americans not working, tax revenues have fallen. The government is forced to borrow partly because tax revenues are so low by historical standards. In 2011, for the third consecutive year, “revenues would be just under 15 percent of GDP; levels that low have not been seen since 1950,” the report says. Over the past 40 years, total revenues have averaged about 18 percent of GDP.

Video: Deficit to hit record high

Democrats could use this to rebut Republican arguments that Americans “are not under-taxed.”

New revenue gained from health care law
And CBO reminds Congress that the health care law does have tax increases and new revenues in it: For example, $91 billion will be collected through 2021 from a new fee on health insurers set to begin in 2014.

And CBO does not back away from its estimate that the health care law, largely due to its cuts in future Medicare spending, will reduce future deficits.

But there’s a warning to both parties from CBO director Doug Elmendorf in his blog post on the report.

Deficits should shrink to about 3.6 percent of GDP, starting next year and for the next several years, he said. But that will occur only if Congress does three things which both Republicans and Democrats are reluctant to do:

  • Allow the alternative minimum tax to bite more and more middle-class people. (Congress has repeatedly passed one-year AMT “patches” to keep the tax from affecting the middle class. It has a big impact especially on taxpayers in relatively high-income states with high state taxes, such as Maryland and New York.)
  • Raise taxes on upper-income people by reverting to the pre-2001 income tax rates. (Obama and Congress agreed to a two-year postponement of this tax increase, but Obama renewed his call for the tax hike on Tuesday night.)
  • Curb the annual increase in Medicare’s payment rates for physicians, to bring them into line with the inflation rate in the wider economy. Again, Congress has repeatedly passed temporary “doc fix” bills to shield doctors from these cost curbs.

If Congress can’t find the will to do those three things, Elmendorf said, deficits from 2012 through 2021 would average about 6 percent of GDP and debt would rise to a level not seen since right after the Japanese signed the instrument of surrender on the battleship Missouri.

© 2013 msnbc.com Reprints

Video: McConnell: Obama’s spending cut proposal ‘inadequate’

  1. Closed captioning of: McConnell: Obama’s spending cut proposal ‘inadequate’

    >> joining us now, senate republican leader mitch mcconnell . thank you for joining us, senator. let me start with a question about the atmospherics. i believe you've been in there for 27, 28, 29 speeches to joint sessions of congress. not trying to age you there, but how different was it compared to the others you've been an audience member for?

    >> not that different, chuck. i don't care the seating arrangement had much of an impact. i think it was a good speech by and large. the president tends to emphasize state of the unions, excuse me, speeches areas where we might work together. we've heard that last year. i think more important question is not what president says, but what he does and we're hopeful that we can work together to lower the corporate tax rate to pass these three trade agreements that have been languishing during the period the democrat were in control of congress with korea, colombia and panama. those are the kind of things we ought to be doing. i found his suggestion about spending reduction inadequate. to freeze spending at this high level we've achieved over the last two years is totally inadequate and i think we are bound for some disagreements on the issue of reducing our annual debt. running in excess of a trillion dollar deficits has really got to stop.

    >> on the topic of spending, you said when the president uses the word, investment, he's really referring to spending. my question to you is in the context of an overall budget freeze, does the president not make a sensible argument about all right, you've got x amount of resource, so it makes more sense to direct more roesources, so increase spending in other areas as long as you end up with a budget freeze, why not make investments in a sensible way.

    >> that makes sense if your top line is lower than he recommends. he's talking about freezing at a historically high spending rate.

    >> how much do you want to cut?

    >> we need to get back to the 2008 level. that's a significant whack out of our annual discretionary spending and that's what we're going to try to achieve. i believe the house of representatives will pass that. we'll be voting on that in the senate. that is a significant reduction . now, let me applaud him for one other thing he said and that is it's time to take a look at our long-term unfunded liableties, which are very popular. he knows that that will not be done except on a bipartisan basis and i hope he means it. if we want to leave behind the kind of country our parents left for us, we've got to tackle that problem and the perfect time is when you have divided government . neither party has all the power.

    >> speaking of divides parts of the government, last night, there was an unofficial second republican response from michele bachmann that some argue it stepped on the official republican response of paul ryan and you seemed to echo some of the comments ryan made. do you wish congressman bachmann had not done what she did?

    >> there are 535 members of congress who respond to the state of the union .

    >> she dhoez take a high profile. and they seemed to also market it that way.

    >> well, i think she probably got a little more coverage than most members of congress, but everybody was responding to it. that's what happened last night.

    >> obviously, the president talked about health care . we know house republicans have passed a repeal of health care , senator reid and your chamber says he won't bring it to the floor and you've talked about getting the repeal to the floor of the senate. do you still intend to do that and how can you being a member of the minority party ?

    >> the bill came over last night. i did what's called holding it at the desk. i would say to my good friends on the other side, if you're so proud of this accomplishment, why would you not vote on it.

    >> when they say they've already voted on it.

    >> could i finish my answer? only three house democrats voted to repeal it, so obviously, the democrats in the house proud of it. it's very high on the agenda of the american people . we'll have the vote one way or the other, but i don't understand why the majority wouldn't want to vote on it. they're proud of it. they're bragging on it. the president thinks it's an important accomplishment for the country.

    >> i want to ask you about something not mentioned in the state of the union . egypt. you just came from overseas with afghanistan, but focusing on what's going on there this morning, obviously, it's unstable. "the washington post " this morning recommending to the president and secretary state clinton that maybe there shouldn't be knee jerk support for mubarak on this. where do you come down?

    >> all i think i can say is that egypt has been an extremely important ally of ours and we're watching these developments very carefully. beyond that, i will not comment.

    >> let's get back to one other item mentioned. i think you just mentioned. corporate tax reform. the president talked about working with republicans to lower corporate tax rates, but in the context of closing up other loop hoping that aides made clear it wouldn't result in a tax reduction. would be a closing of loopholes and simplifying of the tax code . would you support corporate reform that didn't end up in a reduction of the corporate tax burden?

    >> i think getting the corporate tax rate down to a competitive level is extremely important. we want to create additional american jobs in america for americans. how you structure it is something we'll take a look at. most tax reform , when your rate has a goal of being revenue neutral, we'll look at how the administration would propose to quote pay for lowering the tax rate . most members of the my side of the aisle, myself included, are typically skeptical about the quote pay fors when they're willing to go along with the tax decrease, but we'll take a look at it. the important thing is to get america's corporations in a more competitive place and the goal of lowering the corporate tax rate is extremely important.

    >> senator mcconnell, the president's going to come out with more details in three weeks in the budget which may include shrinking of cabinet agencies. he hinted at that last night. are you going to come up with an alternative budget or is it house republicans that will do it? are you going to have a counter full fledged budget to sort of counter the president's?

    >> i can't answer that as far as the senate's concerned. we're not in the majority in the senate and the majority will have to decide whether it wants to pass a budget . i think it should, frankly. congress when in the hands of the democrats, failed in passing a budget at all. another factor in the bad election that our friends on the other side of the aisle had last november. i think we ought to try and pass a budget .

    >> before we let you go, last time you were with us, we noticed something about the way you answered our questions. let's play a little montage.

    >> this is about raising taxes in the middle of a recession. we should not be raising taxes on anyone in the middle of a recession. we ought not to be raising taxes on any american in the middle of this economic slowdown. it is a bad idea to be raising taxes on anybody in the middle of a recession.

    >> you're known as somebody who stays on message better than anyone else . what's that all about?

    >> well, i think you have to decide what you're going say and in order to drive any message home, repetition is a good idea.

    >> speaking of being on message, are you endorsing john thune for president if he decides to run? you almost sounded like that yesterday.

    >> i wouldn't want to give him that handicap, but i think john is an extraordinarily impressive individual. i hope he'll run. i think he'd make a great president of the united states .

    >> mitch mcconnell , it's great to

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