Last week both Doug Elmendorf, director of the Congressional Budget Office (CBO), and Ben Bernanke, chairman of the Federal Reserve, urged Congress to put the country on a more responsible long-term fiscal path without jeopardizing the current economic recovery.
Their separate testimonies on Capitol Hill came shortly after the CBO released its 2012 Long-Term Budget Outlook and amid rising concern in Washington over the “fiscal cliff” at the end of this year, when certain tax cuts are set to expire and substantial automatic spending cuts are scheduled to start.
Elmendorf reviewed the two very different scenarios depicted in the CBO report. The first scenario assumes the continuation of current law, including scheduled spending reductions and the expiration of tax cuts at the end of the year. The CBO’s “alternative” scenario – a gloomier one that many analysts consider more realistic – assumes changes in the law to keep certain policies in place and to modify some provisions that might be difficult to maintain.
Bernanke and Elmendorf both emphasized the need for policymakers to start making the necessary tough choices to protect our fiscal future. But they called for elected officials to deal with the approaching fiscal cliff in a way that would protect the economy in the short term as well.
Over the long term, Elmendorf made clear that the alternative scenario based on continuing current policies is unsustainable: “Under those policies, federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels.”
Bernanke expressed similar worries while underscoring the growing pressure on the budget from the aging population and health care costs. “At best,” he said, “rapidly rising levels of debt will lead to reduced rates of capital formation, slower economic growth, and increased foreign indebtedness. At worst, they will provoke a fiscal crisis that could have severe consequences for the economy.”
The Concord Coalition has long argued that short-term support for the struggling economy and long-term fiscal reforms were not only compatible with each other but could be mutually reinforcing.