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Confusion about the economic and fiscal projections in last week's Budget and Economic Outlook released by the Congressional Budget Office....The reason for the confusion is that CBO is required to base its estimates on "current law" -- regardless of whether current law is expected to change. Consequently, CBO was required to assume that the Bush tax cuts will expire at the end of 2012, even though Democrats and Republicans are in agreement that the tax cuts should be extended (except for continuing disagreements on extending cuts for upper income taxpayers).

In addition, current law requires CBO to assume that annual AMT (Alternative Minimum Tax) relief will expire (even though the relief will almost certainly be extended); current law further requires CBO to assume that Medicare physician pay will be automatically cut by 27 percent in March of 2012 (which will almost certainly be blocked by Congress); and current law requires CBO to assume that major automatic cuts in defense and nondefense discretionary spending will take effect in January 2013 for every year through 2021 (which is somewhat dubious, particularly for the defense cuts).

Operating under these constraints, CBO was forced to conclude -- unrealistically -- that imminent tax increases and major spending cuts will weaken the recovery, leading to low growth and higher unemployment in the near term -- and declining deficits in the long-term.

Because these "baseline" (current law) projections are built on unrealistic assumptions, they should be taken with a grain of salt. In all likelihood, the Bush tax cuts (with the possible exception of upper income taxpayers) will be extended; AMT relief for the middle class will be extended; Medicare physician payments will not be drastically cut; and an additional half trillion dollars (over 9 years) in defense cuts will probably not take effect in January of 2013. (Indeed, the $487 billion in defense cuts already proposed by the Pentagon to comply with last summer's Budget Control Act spending caps are highly controversial.)

CBO is well aware of the shortcomings of the current law baseline and, consequently, they have also provided an "Alternative Fiscal Scenario" -- intended to be more realistic -- which assumes the Bush tax cuts continue, the AMT is indexed for inflation, Medicare's physician payment rates remain constant, and the automatic spending cuts beginning in 2013 do not take effect.

Under this more realistic Alternative Scenario, growth is higher in the near term, but deficits and debt are much worse over the long-term (because taxes are lower and spending is higher). Specifically, deficits would average 5.4 percent of GDP over the next decade and debt held by the public would reach 94 percent of GDP by 2022 -- the highest figure since just after World War II. This is the most important number in the entire report and reflects the unsustainable growth in debt our nation faces unless actions are taken to slow the growth of entitlements and reform the tax code.

Key fiscal projections:

1. FY 2012 Deficit: CBO projects a $1.1 trillion deficit for FY 2012, which is 7 percent of GDP -- about 2 percent below the FY 2011 deficit of $1.3 trillion, which was 8.7 percent of GDP.
   
   
2. Deficits declining, then rising again: Under the Alternative Fiscal Scenario, deficits are projected to decline to $981b in 2013, $917b in 2014, $899b in 2015, and then begin increasing in 2016, exceeding $1 trillion again by 2018. (As a reminder, this "Alternative Scenario" assumes the automatic cuts scheduled for 2013 do not go into effect. Deficits would be more than $100 billion per year lower if they do go into effect.)
   
   
3. Cost of extending the tax cuts: Under the Alternative Scenario, the 10-year cost of extending the Bush tax cuts and indexing the AMT for inflation is $5.4 trillion.
   
   
4. Why deficits will grow: Deficits turn upward again in the latter half of the decade in large measure due to the unsustainable growth of Medicare, Medicaid, and Social Security, with the aging of the population (the boomers retiring) and healthcare costs growing faster than the economy.
   
   
5. Defense and domestic discretionary spending: If, contrary to the assumptions of the Alternative Scenario, automatic defense and discretionary cuts go into effect next year, discretionary spending as a share of GDP would decline to its lowest levels in 50 years over the next decade. According to CBO, this would have a "dampening effect" on the economic recovery. Defense outlays would decline to 3.0 percent of GDP in 2022, compared with a 40-year average of 4.7 percent; and nondefense outlays would decline to 2.6 percent of GDP in 2022, compared with a 40-year average of 4.0 percent.
   
   
6. Economic quandary: near-term growth vs. long-term debt reduction: The "dampening effect" of the defense and domestic discretionary spending cuts is central to the economic quandary facing the U.S. (and Europe).
   
   Recent austerity measures in the U.S. (the large spending cuts enacted last summer), while reducing long-term debt, also weaken near-term economic recovery. (Similarly, major spending cuts and tax increases in Europe reduce the EU debt ledger but increase the possibility of recession, which is why we're beginning to hear more from European leaders about possible stimulus measures. CBO is forecasting a shallow recession in the euro zone in 2012.)
   
   At the same time, the nation's growing long-term debt -- left unchecked -- will eventually lead to ballooning federal interest payments, higher interest rates, less capital for private investment, a weakening economy, and another recession.
   
   The key for policymakers is to find the right balance of near term stimulus (tax cuts and public investment) and long-term debt reduction. The Domenici-Rivlin Bipartisan Task Force sought to strike the appropriate balance by proposing a full one-year payroll tax cut (much larger than what is currently being debated) along with entitlement and tax reforms to stabilize the long-term debt at 60 percent of GDP. Similarly, Congressional Quarterly has reported that Senate Budget Committee Chairman Kent Conrad is proposing a short-term extension of expiring tax cuts and a delay in scheduled spending cuts to strengthen the recovery, coupled with long-term spending cuts and revenue increases to reduce deficits.
   
   
7. Entitlement growth: Medicare, the national health insurance program for seniors and disabled Americans, will nearly double in total cost between 2012 and 2022, from $560 billion to more than $1 trillion. Medicaid, the joint federal-state health coverage program for low-income Americans (including seniors), will more than double in (federal) cost between 2012 and 2022, from $262 billion to $605 billion. The rapid cost growth for both programs is due to the aging of the population and healthcare costs growing faster than the economy.
   
   Social Security, including retirement and disability benefits, will grow from $770 billion in 2012 to $1.3 trillion in 2022 -- an increase of nearly 75 percent, due to the aging of the population. Between 2011 and 2022, the number of retirees or survivors receiving benefits will increase from 44 to 61 million.
   
   Other entitlement programs projected to grow substantially over the next decade (2012 - 2022): Supplemental Security Income (cash benefits to people with low income who are elderly or disabled) is projected to grow from $53 billion to $73 billion; federal civilian retirement from $87 billion to $118 billion; military retirement from $49 billion to $75 billion; and veterans compensation from $56 billion to $77 billion.
   
   
8. Tax Expenditures: Due to the growing debt crisis, increasing attention is being paid to the cost of "tax expenditures," which are revenue losses attributable to exclusions, exemptions, deductions, and credits in the tax code. They are called tax "expenditures" because they resemble government spending by providing financial assistance to specific activities, entities, or groups of people. CBO estimates that the largest tax expenditures will cost nearly $12 trillion over 10 years (2013 - 2022) and include: exclusion of employer-provided health insurance; exclusion of pension contributions and earnings; mortgage interest deduction; reduced tax rates for dividends and long-term capital gains; exclusion of capital gains at death; deduction for state and local taxes; charitable deductions; earned income tax credit; and the child tax credit.
   
   
9. Unemployment: CBO estimates that unemployment in the 4th quarter of 2011 would have been 1.25 percent higher than the actual rate of 8.7 percent, if the numbers were not skewed by people dropping out of the labor force.
   
   
10. Debt reaching 94 percent of GDP and interest payments of $900 billion in 2022: Under the Alternative Fiscal Scenario, debt will reach 94 percent of GDP in 2022, causing federal interest costs to increase dramatically -- with interest spending reaching 3.8 percent of GDP in 2022, more than $900 billion in that year alone.
    
    
11. Foreign investors own nearly half of U.S. securities: Of the $10.1 trillion in federal debt held by the pubic at the end of 2011, 55 percent was held by domestic investors and 45 percent by foreign investors.
    
    
12. Interest rates to stay low for the near-term: CBO "projects that interest rates will remain very low for the next several years and then will rise to more-normal levels as out put approaches its potential. That forecast reflects CBO's view that the demand for credit will be restrained and the rate of inflation will be low while the economy has so many unused productive resources and that investors will continue to seek the relative safety provided by U.S. Treasury securities while banking and fiscal problems continue in Europe."

Speaker Boehner says automatic cuts in defense need to be replaced....In an interview with the PBS NewsHour on February 6, 2011, House Speaker John Boehner said, "I think the defense cuts...that would take place in January of 2013 are unsustainable and will put America at a distinct disadvantage when it comes to defending our interest at home and abroad....I think it's going to have to be replaced. We just can't undo it; it needs to be replaced."

Note that the nearly half trillion dollars in automatic defense cuts (through 2021) are in addition to the $487 billion in cuts announced by the Administration last month in order to comply with spending caps adopted as part of last year's debt ceiling deal. The half trillion in additional automatic cuts will kick in January of 2013 because of the failure of last year's congressional "Super Committee" to agree on a package of entitlement and tax reforms to reduce deficits over the next decade.

Overall, last year's debt ceiling deal called for about $900 billion in reductions achieved through defense and domestic spending caps, plus another $1.2 trillion to be achieved by the Super Committee or through automatic spending cuts if the committee failed to reach agreement -- for a total of $2.1 trillion. (The automatic cuts are divided equally between defense and nondefense cuts. The nondefense cuts are primarily discretionary programs, but include some Medicare reductions.)

House passes budget process changes....On February 2, the House passed (largely along party lines) HR 2582 requiring the Congressional Budget Office to estimate the economic growth potential from tax cuts (often referred to as "dynamic scoring"). Opponents, including most Democrats, argue the change would make the budget process less credible and would encourage more deficit-increasing tax cuts. Senate passage is not expected.

On February 3, the House passed (also along party lines), HR 3578 that would prohibit the Congressional Budget Office from building inflation into its annual "budget baselines," which serve as the starting points for assembling the federal budget. Supporters of the change argue that building inflation adjustments into baselines lead to confusion about whether proposed spending levels are actually "cuts" below the previous year's level, or reductions compared to the inflation-adjusted levels. Opponents argue that eliminating inflation adjustments would give policymakers a misleading picture of the actual cost of continuing current federal services. Senate passage is not expected.

On February 8, the House passed with a strong majority (254-173) legislation that is loosely being referred to as a line-item veto bill -- although it is not a bill allowing the President to veto specific provisions in appropriations legislation. The bill, HR 3521, would provide for "enhanced rescission" authority. Unlike the line-item veto that was struck down by the Supreme Court in 1998, this measure simply guarantees that Congress would hold an up-or-down vote, on an expedited basis, on proposals by the President to "rescind" specific items in appropriations bills. Funding would be canceled only if Congress approves the rescission. Under current law, the Congress is not required to vote on rescissions proposed by the President. Link to Statement of Administration Policy supporting the bill.

While there's a lot of political posturing in support of the enhanced rescission bill, its impact on the debt would be negligible since it would not reform entitlement or tax laws -- the prerequisites to significant deficit reduction. Instead, the bill presents the important issue of whether expanding the President's current rescission authority would upset the balance of powers between the Executive and Legislative Branches. More specifically, after Congress sends the President a bill, should the President have the authority to require Congress to vote again on selected provisions of that bill, and how might that impact the give and take that occurs during legislative negotiations? According to Congressional Quarterly, prospects for the bill in the Senate are uncertain due to opposition from Majority Leader Harry Reid and members of the Senate Appropriations Committee.

Senate Majority Leader Harry Reid has announced the Senate will not consider an FY 2013 Budget Resolution....although Senate Budget Committee Chairman Kent Conrad has promised to move forward with a committee mark-up. Congressional Quarterly reported Reid as saying, "Now, Sen. Conrad may mark something up in his Budget Committee....It doesn't have to come to the floor." The appropriations process will be unaffected by Reid's decision to bypass a Budget Resolution, because last year's Budget Control Act already established defense and nondefense discretionary spending levels for FY 2013. However, the decision also means there will be no debate on entitlement and tax reform measures to address the growing U.S. debt. By contrast, the House is expected to act on an FY 2013 Budget Resolution to be marked up by the House Budget Committee in March.

No progress yet on finding offsets to pay for the payroll tax cut extension....Sen. John Kyl (R-Ariz), one of the Senate conferees on the bill, said on Tuesday “the reality is that as of today we haven't made much progress....And time's a-wasting if we're going to get this done before the recess.”

The Fiscal Calendar:

- Monday, February 13, 2012: President's FY 2013 Budget is released (the one week delay was announced on 1/23/12)

- Wednesday, February 29, 2012: Payroll Tax Cut Expires

Below:
The Top 5 Stories We’ll be Watching in 2012
The 3 Big Stories of 2011:
Budget Control Act; Super Committee & Automatic Budget Cuts; Payroll Tax Cut
Key Numbers. . . From RealTimeNumbers.com


The Top 5 Stories We’ll be Watching in 2012

1.      The Debt Ceiling

The House voted largely along party lines (239-176) on January 18 to disapprove a $1.2 trillion debt ceiling increase requested by the President. However, the Senate rejected the House measure 44-52 on January 26, clearing the way for the statutory debt ceiling to increase on January 27, 2012.

The debt ceiling increase was never in doubt since the President was poised to veto any measure blocking the increase. Failure to raise the ceiling would have led to a catastrophic U.S. default. It is unlikely the debt ceiling will need to be raised again until after the November elections.

Background: Last summer's Budget Control Act triggered an initial $400 billion increase in the debt ceiling in August; and an additional increase of $500 billion in September (when a disapproval resolution only passed the House). A third increase of $1.2 trillion occurred on January 27, 2012, after the Senate rejected a House resolution to block the increase. Congress has voted to raise the debt ceiling 11 times since 2001 due to annual deficits and the requirement that Social Security and other federal trust funds invest their receipts in U.S. securities.

As discussed below, under major stories of 2011, last summer’s debt ceiling fight was an example of Members of Congress using the imminent debt crisis and the threat of a U.S. default to force changes in spending policies – in that case, the adoption of tight spending caps on domestic spending and the creation of the now-defunct Super Committee.

A similar debt ceiling stand-off could occur again at the end of 2012, when the Treasury's borrowing authority is again expected to bump up against the statutory debt limit.

2.      March 1:  Will the Payroll Tax Cut and Unemployment Benefits Lapse 

At the end of December, after weeks of political posturing, Republican and Democratic leaders in Congress agreed to a 2-month extension of the payroll tax holiday and unemployment benefits for the long-term unemployed.  The payroll tax holiday lowers employee payroll withholding from 6.2% to 4.2%.  The proposal grew out of a much larger proposal by the Domenici-Rivlin Bipartisan Task Force for a full payroll tax holiday to stimulate the weak economy in the short-run while simultaneously placing long-term debt reduction measures in place. As Congress reconvenes in January, a House-Senate conference committee will convene to negotiate the terms of an extension through the balance of 2012.  The main sticking point is finding offsets to pay for the extension.  Republicans have proposed offsets opposed by Democrats including federal pay freezes, federal layoffs and reductions in federal retirement. Senate Democrats proposed a millionaires surtax flatly opposed by Republicans. However, in the end, neither party wants to be blamed for the take home pay of most Americans declining on March 1. 

Also tied in with these deliberations are: (1) extension of unemployment benefits; and (2) a temporary fix to the ongoing problem of an existing statutory formula that would trigger drastic reductions in Medicare physician payments – were it not for Congress’ periodic actions to temporarily delay the cuts (the so-called “doc fixes”).  The reason the problem has yet to be permanently fixed is the 10-year $300 billion cost of eliminating the statutory requirement.

3.      FY 2013: A tough year ahead for appropriations - spending caps and automatic cuts

Release of the President’s FY 2013 Budget on February 6^th will kick off the FY 2013 budget process.  FY 2013 will be a tough year for appropriations. The spending cap enacted last summer for FY 2013 is $1,047 billion, as compared to last year's cap of $1,043 billion -- a virtual freeze that provides no adjustments for inflation, population growth, rapidly escalating veterans healthcare expenditures, or growing infrastructure needs. (Adjustments are limited to war spending, disaster relief, and other emergencies.)

In addition, in January of 2013 automatic spending reductions will kick in amounting to nearly $100 billion in defense and nondefense appropriations -- due to the failure of last fall's congressional Super Committee to reach a deficit reduction agreement. (See major stories of 2011, below, for an explanation of the automatic cuts.)

Moreover, with this year being a highly contentious election year, expect the appropriations process to be brimming with posturing by both political parties over defense and homeland security spending levels, insufficient funding for infrastructure, and a host of policy riders to appropriations bills. As October 1^st approaches, it is unlikely that Republicans and Democrats will be able to come together to pass full year appropriations for FY 2013, and will likely resort to a continuing resolution to keep the government running until after the November 6 elections. 

4.      December 31: Will the Bush tax cuts expire?

Background:  The Bush tax cuts – enacted in 2001 and expanded in 2003 – were originally set to expire at the end of 2010, due to a Senate rule designed to prevent increases of federal debt over the long-term (the so-called Byrd Rule). 2010 saw an intense political debate about whether to make permanent the lower rates and expanded credits and deductions.  Deficit hawks raised concerns about extending the cuts. Republicans sought a permanent extension of all tax cuts arguing that increasing taxes on upper income Americans would slow economic growth. The White House and congressional Democrats sought to extend the cuts for the middle class but allow tax rates on upper income taxpayers to return to pre-Bush levels to reduce projected deficits.    In the end, after Democrats took a beating in the 2010 mid-term elections, the White House agreed to a two-year extension of all the cuts.

The debate over extension of the Bush tax cuts returns to center stage this year, with the cuts expiring at the end of 2012.  Much of the FY 2013 budget process will focus on efforts in the House to permanently extend all of the tax cuts and Senate efforts to allow the cuts to expire for upper-income taxpayers.  Also tied in with this issue is the fate of dozens of expired tax incentives (the so-called “tax extenders”) such as the R&D tax credit, the New Markets Tax Credit and other popular measures, as well as dealing with the Alternative Minimum Tax which continues to threaten middle class taxpayers.

Despite all of the partisan posturing over the fate of the Bush tax cuts, there is growing agreement among Members in both parties, that the tax code needs a major overhaul in 2013 to reduce the vast number of credits and deductions (now costing over a trillion dollars per year).  Where the agreement dissolves is how to use the budget savings – for deficit reduction, to reduce individual and corporate rates, or some combination of the two approaches. This movement for sweeping away many of the credits and deductions and simplifying the code gained a big head of steam when endorsed by both the Domenici-Rivlin and Simpson-Bowles Debt Reduction Commissions.

5.      Will Congress repeal / modify the automatic defense and domestic spending cuts before they take effect in January 2013?  

Last year’s debt ceiling deal required that if the congressional Super-Committee failed to report $1.2 trillion in deficit reduction over 10 years, automatic cuts kick in for both defense and domestic spending.  As explained below, under “Big Stories of 2011,” the automatic cuts will require between 8 and 10 percent cuts in total defense spending in each year between 2013 and 2021, and between 5 and 8 percent cuts in total nondefense spending in each year through 2021 (with “cuts” being measured against a baseline that grows with inflation).

Republicans have already introduced legislation to roll back the defense cuts and Democrats are deeply concerned about the domestic cuts. However, repeal is unlikely.

President Obama has promised to veto any legislation to repeal the automatic cuts unless accompanied by an alternative deficit reduction plan that is “balanced” – with new revenues as well as entitlement reforms. 

Given the current political stalemate, the prospects for a comprehensive alternative plan emerging prior to November 6^th are slim at best.  However, depending on the outcome of the election, modification of the automatic cuts following Thanksgiving or immediately after the New Year are possible – particularly in conjunction with legislation addressing the expiration of the Bush tax cuts and various other expiring tax provisions, as well as a necessary debt ceiling increase.

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The 3 Big Stories of 2011


1. August 2011 Debt Ceiling Agreement:  The August 2011 Debt Ceiling Agreement included more than $750 billion in spending cuts (compared with what spending would have been if appropriations were allowed to grow with inflation) by placing statutory caps on discretionary spending for 10 years. Including interest savings, this totals up to deficit reduction of more than $900 billion.  In addition, the Debt Ceiling Agreement established a “Super Committee” to achieve another $1.2 trillion in deficit reduction.  

The total deficit reduction of about $2.1 trillion over 10 years —even though an enormous reduction in discretionary spending—is not sufficient to stabilize the projected explosion of U.S. debt. The Domenici-Rivlin Bipartisan Debt Reduction Task Force estimated that fully stabilizing the debt for the long-term would require nearly $6 trillion in deficit reduction over 10 years.

Background:  In August, the Treasury was close to hitting the statutory ceiling on the (gross) U.S. debt (about $15 trillion), threatening a possible default.  Deficit hawks used the threat of default to force enactment of the Budget Control Act of 2011 which had two key provisions:

1. The BCA imposed tight caps for the next 10 years on total discretionary spending. The programmatic impact of these reductions will be determined each year in the appropriations process.  (“Discretionary spending” refers to programs that are annually appropriated, as opposed to “entitlements” like Social Security and Medicare – the costs of which are driven by benefit formulas written into the law.) 

The BCA’s 10-year spending caps are very tight and will significantly impact many programs – both defense and non-defense.  Under the spending caps, total discretionary spending remains well below FY 2011 levels for the next decade (see the table below).

Although, recent political rhetoric might suggest that the caps are not significant, the challenges for policymakers are daunting because: (1) the costs of a growing and aging population must be absorbed within declining spending caps; (2) vital transportation infrastructure repairs and expansions must be absorbed within the caps; (3) the rapidly growing costs of veterans health care must be accommodated; and (4) the costs of inflation must be fully absorbed. (Adjustments are permitted for emergencies and military operations.)

To put this in perspective, under the spending caps total discretionary spending declines as a percent of Gross Domestic Product (GDP) from 9% in FY 2011 to 6.1% in FY 2021.  Since FY 1962—the first year for which data is available—discretionary spending has only been that low as a percent of the economy in one other year.

The spending caps are enforced through automatic across-the-board cuts that are implemented by the Office of Management and Budget if the cap for any year is exceeded. 

 

2. The Debt Ceiling Agreement also established a Joint Select Committee on Deficit Reduction – the so-called “Super Committee” of 6 Democrats and 6 Republicans – which was required to report to the full Congress by Thanksgiving a plan to further reduce projected deficits by $1.2 trillion over 10 years.  Republicans hoped the Super Committee would tackle entitlement reform and Democrats hoped the Super Committee would tackle tax reform (but as explained below, the Super Committee failed).

2. Failure of Super Committee triggers automatic cuts:  On November 21^st, the Super Committee announced failure to reach agreement, setting up automatic spending cuts in January 2013.

Under the terms of the Budget Control Act, failure of the Super Committee to come up with $1.2 trillion in budget savings will trigger in January of 2013 automatic across-the-board cuts that will drive discretionary spending even lower than the already established caps. Automatic cuts will also be made in some mandatory (entitlement) programs, primarily Medicare.

Here’s how the automatic cuts will work (in plain English):

- The automatic cuts are designed to save $1.2 trillion by FY 2021, since the Joint Committee failed to do so.  Excluding interest savings, this requires about $1 trillion in program cuts.

- The cuts are to be divided evenly between defense and non-defense programs – about a half trillion from defense and a half trillion from non-defense over the 9 years.

- The cuts are to be spread evenly over the 9 years (2013-2021), requiring about $55 billion in cuts from defense and $55 billion in cuts from non-defense in each of the nine years.

- In FY 2013, the required budget cuts of $55 billion in defense and $55 billion in nondefense, are to be carried out through across-the-board cuts.  The Congressional Budget Office (CBO) has calculated that this will require 10 percent cuts in all defense accounts, and 7.8% in all non-defense accounts (except for those programs that are exempted by law).  These are cuts in addition to those already required to comply with the spending caps enacted by the Budget Control Act.

- Most of the cuts will come from discretionary spending programs (i.e., programs that are annually appropriated) because most of the entitlement programs – such as Social Security, Medicaid, Veterans Compensation and Food Stamps -- are exempted by law.  In addition, the President has discretion to exempt military pay from the automatic cuts.

- Medicare, however, is only partially exempted and is subject to a 2 percent cut in benefits in each of the years, amounting to $123 billion in benefit cuts over 9 years.

- In each of the years after FY 2013, the cuts are not required to be across-the-board as long as they produce the required $55 billion in defense and $55 billion in non-defense savings.  If Congress fails to produce the required amount of savings, the Office of Management and Budget is required to make up the difference through across-the-board cuts.

- The automatic spending reductions required in each of the 9 years are estimated by CBO as shown in the table below.  It is important to understand that these “cuts” are measured against a baseline that assumes annual increases for inflation.  So, for example, actual defense spending is not being reduced by $55 billion each year.  The cuts are $55 billion from a baseline (or starting point) that increases annually with inflation.

The idea behind the automatic cuts is that they would serve as a “Sword of Damocles” to force agreement by the Super Committee and, in the event of failure, would guarantee an additional $1.2 trillion of deficit reduction – and possibly cause Congress to act in 2012 on legislation to replace the across-the-board cuts with a more sensible approach.

However, the automatic cuts won’t solve the debt crisis and have some serious flaws...The cuts fail to address the largest drivers of projected debt – entitlement growth driven by the aging of the population and health care costs growing faster than the economy – and a deficient tax system that loses too much in special deductions and credits and places the U.S. at a competitive disadvantage.  In addition, some argue that the automatic cuts are economically risky, because they’ll reduce government investment in highways & bridges, schools, public transit, airport modernization, and health research when the economy is weak and needs public investment. 

3. Two-month extension of payroll tax cut:  After a protracted political showdown, Congress in late December again kicked the can down the road approving an extension of the payroll tax cut and unemployment insurance for a mere two months.  This continuing logjam comes at a time when the expiration of tax relief for the middle class and unemployment benefits could further slow the economic recovery. 

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Key Numbers.... from RealTimeNumbers.com

Fiscal Year 2011 ended with a budget deficit of $1.3 trillion, about the same as the previous year – but a bit lower as a percentage of GDP: 8.7% as opposed to the previous year’s 9%.  This marked the third year in a row in which deficits exceeded $1 trillion – having exploded upward in 2009 due to the budgetary effects of the Great Recession and policies implemented in response to it. From FY 1946 to FY 2008, budget deficits averaged 1.7% of GDP and exceeded 5% only 3 times (’46, ’83, and ’85). From FY 2009 – 2011, deficits will average roughly 9.4% of GDP.  The Federal Debt Held by the Public (now about $10.5 trillion) has grown from 40% of GDP in 2008 to 69% in 2011. How much are we really spending?  With all the political spinning, it’s difficult to get a clear idea of what’s really going on with federal spending.  The nonpartisan Congressional Research Service recently reported that last year’s Debt Ceiling Agreement “was enacted after a period of rapid growth in discretionary spending....Between FY2000 and FY2009, discretionary spending rose by 8% per year, on average. Discretionary spending rose by 8.9% in FY2010. Increases in discretionary spending since FY2000 can be attributed primarily to a rise in defense spending throughout the decade, and an increase in spending as a result of economic stimulus programs since 2009,” most of which will occur by FY2012.  However, if one looks at the big picture of total government spending, the main drivers will increasingly be Medicare, Medicaid, and Social Security due the aging of the population and health care costs growing faster than the economy. Shrinking Middle Class...Nearly one of two Americans (more than 146 million people) are now classified as either in poverty or “low income,” according to new U.S. census data.  “Low income” is defined as those earning between 100 and 199 percent of the poverty level. Budget Costs of TARP...The Troubled Asset Relief Program (TARP) was created in October 2008 by the Economic Stabilization Act following the financial meltdown.  Initially capitalized at $700 billion, it was later reduced to $475 billion (by the Dodd-Frank legislation).  Due to repayments by banks and the auto industry, the nonpartisan Congressional Budget Office (CBO) now estimates the overall budget cost to have dropped to $19 billion.

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