President Obama delayed one fiscal deadline Tuesday and sought to defer another.
The President signed legislation into law Tuesday suspending the statutory debt limit until May 18. He also held a briefing at the White House where he called on Congress to agree on a short-term plan with spending cuts and increased revenue to delay the across-the-board cuts of the sequester slated to take effect March 1. He says he wants to buy time to enact a broader deficit reduction plan.
Fix the Debt hopes that a smart, comprehensive deficit reduction plan can emerge from the desire to avoid the sequester. As we said in a statement:
The Campaign to Fix the Debt believes that any delay of the looming, nearly across-the-board ‘sequestration’ spending cuts should be fully paid for. It should also lay the groundwork for a comprehensive agreement to address our debt. We are encouraged by President Obama’s statement that changes to entitlement programs are still a central part of this discussion.
The President’s timing was fitting as the latest numbers released the same day underscore the need for a thoughtful approach to addressing the long-term debt. In its 2013 Budget & Economic Outlook the nonpartisan Congressional Budget Office (CBO) paints a picture of a sluggish economy and rising debt. Here are some key points:
- Even if the sequestration is allowed to occur, debt is on an upward path. Between 2018 and 2023 debt will rise from 73 percent of GDP to 77 percent in 2023 and is rising by about 1 percent per year through the 2020s.
- If policymakers choose to waive the sequester, continue “doc fixes”, and extend all expiring tax provisions debt will rise to 87 percent of GDP by 2023 and be on a rapid upward path.
- Although avoiding most of the fiscal cliff improved short-term economic prospects, the added debt burden leads to higher interest rates and lower growth in the later part of the ten-year window.
- A companion report from CBO projects that an additional $2.3 trillion of deficit reduction would not only put debt on a downward path toward 68 percent of GDP in 2023, but would also increase the size of the economy by almost 1 percent in that year.
The CBO report shows clearly that substantial further deficit reduction is needed, particularly over the long-term and in a smart manner. This deficit reduction should focus on the long-term drivers of the debt – growing health and retirement costs – but is likely to also require further spending cuts and tax reform. The report signals that care must be taken in the near term, but that long-term deficit reduction will be required and can boost the economy. As the report states:
If policymakers modified the tax and spending policies in current law, their actions could have significant implications for economic growth. For instance, less fiscal tightening this year would lead to stronger growth in 2013 but, if not accompanied by sufficient additional tightening in later years, would also restrain real output and income in the middle of the decade and beyond owing to higher federal debt.
Our partner, the Committee for a Responsible Federal Budget, has a summary and analysis of the CBO report here.
Besides the debt ceiling and sequester, more fiscal pitfalls await. The bill suspending the debt limit also contains a provision withholding the pay of lawmakers if their chamber does not pass a budget by April 15, which should put a priority on a deadline that has been often ignored in recent years. See all the fiscal speed bumps ahead here.
Which one of these events will finally hit home that the debt cannot be ignored?