November 21, 2014

Washington Budget Report July 31, 2012

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Europe’s Difficulties Put U.S. Growth at Risk

As European leaders sought last week to reassure global markets, a forum in Washington outlined the fiscal, financial and economic difficulties that Europe continues to face – and the risks those problems present for the United States.

A central theme of the forum, which was presented Thursday by the Committee for Economic Development (CED) and The Concord Coalition, was that the risks of spillover problems from Europe make it all the more important for Washington to act both to support the U.S. economic recovery in the short term and to develop credible plans for comprehensive fiscal reforms in the longer term.

On Thursday Concord also released a paper entitled “Not Just Their Problem: Europe’s Debt Crisis and U.S. Fiscal Policy.”

“These are critical times,” Senate Budget Committee Chairman Kent Conrad said in his keynote speech at the forum,  “and we’ve got to be smart about how we get back on track.”

The forum also featured Stephanie Riso, head of the European Union's fiscal policy unit, and a panel  of four respected American economists: Douglas Elliott, a fellow with the Brookings Institution; Simon Johnson, an MIT professor; Joseph Minarik, senior vice president and director of research at CED, and Diane Lim Rogers, Concord’s chief economist.  Ed Andrews, a former New York Times economics correspondent, served as moderator.

The Concord paper says the biggest fiscal danger from Europe for the United States “comes through the interconnectedness of our economies.”  Written by Minarik, Rogers and Andrews, the paper also warns: “A prolonged European economic slump even without defaults or exits from the Euro could hurt longer-term U.S. growth and aggravate what is already an unsustainable trend in the federal budget.”

Other themes discussed at the forum included the synchronization of the global economy in recent years, the prospects for more effective government action in Europe, the need for many governments to eventually lower their borrowing, the enormous risks of irresponsible banking policies, the dangers of excessive austerity during periods of economic weakness, and the ways in which more responsible budgeting in Washington could reassure global markets.

 

Mid-Session Review Updates Budget Projections

The administration has updated its economic and budget projections, indicating that this fiscal year’s deficit will be $1.2 trillion, down $116 billion from the administration’s estimate last February. But this drop is based partly on the assumption that some proposed spending for the current year will not be approved by Congress until next year -- increasing the projected Fiscal 2013 deficit by a small amount.

The Office of Management and Budget (OMB) released the new projections Friday in its Mid-Session Review. This review updates the numbers behind President Obama’s budget and is based, as is traditional, on the unlikely assumption that Congress will approve the President’s proposals.

The administration still projects that its policies would reduce annual federal deficits to below 3 percent of the Gross Domestic Product by 2017 and would keep them there for the rest of the decade.

The report estimates that cumulative deficits from 2013 to 2022 will be $240 billion less than the administration forecast in February. “This reduction,” OMB said, “results primarily from lower projected spending for Medicare, Medicaid, Social Security, and net interest, partially offset by lower projected receipts.”

The administration said it made “only minor modifications” to the economic forecast that was included in the 2013 budget that the President proposed early this year. However, the administration’s projections optimistically estimate that real GDP will grow at a rate of 2.3 percent in 2012 and 2.7 percent in 2013.

By 2015 the administration shows growth exceeding 4 percent -- also an outlook that is optimistic compared to private-sector forecasts and seemingly contrary to recent news. On Friday the Commerce Department said the economy grew in the second quarter of this year at an annual rate of only 1.5 percent, down from 2 percent in the first quarter.

 

Senate Approves Extension of Some Tax Cuts

Senate Democrats last week approved a one-year extension of the Bush-era tax cuts for families with incomes of up to $250,000, rejecting a Republican plan to extend the cuts for higher incomes as well.

The Senate defeated the Republican plan on a 45-54 vote, then approved the Democratic legislation 51-48. The Senate action was widely viewed as primarily designed for election-year positioning by both parties. The Democratic plan is not expected to win approval in the House, which plans its own tax votes later this week.

The Concord Coalition has encouraged the two parties to develop comprehensive fiscal reforms, including an overhaul of the tax code that would dramatically reduce special tax breaks that are essentially spending programs in disguise. While this would allow tax rates to be lowered, some of the additional revenue should be used for deficit reduction.

The Senate action last week indicates that the two parties, unfortunately, are no closer to agreement on responsible long-term tax policies. For the short-term, however, it is encouraging that lawmakers have decided to seek only a one-year extension of the 2001 and 2003 tax cuts.