The Congressional Budget Office said Tuesday that it has cut its near- and longer-term view of the U.S. economy, making efforts to get control of the budget an even tougher lift.
For the current fiscal 2012, the nonpartisan budget scorekeeper now expects a fourth straight year of $1 trillion-plus deficits amid economic growth of 2% vs. its prior 2.7% target. While growth would be higher than that if payroll-tax relief and emergency jobless benefits are extended past February, so might deficits.
The CBO now believes that the economy's potential has suffered more of an enduring hit from the financial crisis and recession. It now sees GDP 1.7 percentage points lower in 2020 than it projected last summer.
The smaller economic pie has led CBO to rein in expectations for 10-year revenue by nearly $400 billion.
Under current policies, CBO projects that annual deficits will average more than $1 trillion over the coming decade, pushing public debt to 94% of GDP.
As always, CBO's totally unrealistic baseline makes the debt trajectory look much less worrisome. Under policies written into current law — meaning that all tax relief expires and Washington lets all spending cuts take effect — debt would peak at 75% of GDP in 2013 and gradually decline to 62%.
Even CBO acknowledges that baseline policies would hammer the economy in the short run, cutting economic growth to 1.1% in 2013 and lifting the jobless rate to 9.2%. Unemployment would still be around 7% at the end of 2015.
Federal tax revenue equaled 15.4% of GDP in fiscal 2011 but would jump to a near-record 20% of GDP in 2014 under baseline policies. Those include expiration of the Bush income and investment tax cuts, as well as relief from the alternative minimum tax and payroll tax.
Revenue would supposedly surge 44% from $2.3 trillion in 2011 to $3.3 trillion in 2014.
Baseline policies, which include spending curbs passed along with last August's debt-ceiling hike, also would see defense and other discretionary spending decline from 9% of GDP last year to a four-decade low of 5.6% in 2022.
CBO said that discretionary spending edged down last year for the first time since 1996 and is expected to do so again in 2012.
But spending on entitlement and safety net programs that operate mostly on automatic pilot are seen rising from 13.5% of GDP to 14.3%, soaking up 60% of non-interest outlays.
That growth would come as spending on Social Security and the major health care programs, including President Obama's signature health law, increases at a nearly 7% annual rate.
Standard & Poor's on Tuesday warned of potential downgrades for developed economies within three years.
"Steadily rising health care spending will pull heavily on public purse strings in the coming decades," S&P analyst Marko Mrsnik wrote in a report.
Investment, Labor Pain In discussing the financial crisis' long hangover, CBO said that although capital spending is now recovering from a steep plunge, it will take more than a decade to recoup lost investment.
"Large government deficits during the recession and afterward will raise the cost of capital in the future, further constraining investment," CBO said.
In addition, labor market turmoil has led people to leave the workforce earlier than they would have and resulted in skill-erosion for the long-term unemployed.
As a result, CBO has pared back projections of the size of the labor force, which will further constrain investment.
Although the overall picture from CBO is quite dreary, its forecast would be gloomier still if it didn't include a pretty impressive rebound starting in 2014, with real GDP growth of 4.6%, 4.9% and 3.8% through 2016.