Friday, December 10, 2010

Economic Impacts of Waiting Ten Years To Resolve The US Budget Deficit: CBO Study

From CBO's study of "Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance":
Effects of Delaying Action
Waiting to put fiscal policy on a sustainable course would lead to higher levels of government debt, which would be costly in several ways:
  • Higher debt would reduce the amount of U.S. savings devoted to productive capital (resources that produce economic benefits over time) and thus would result in lower incomes than would otherwise occur, making future generations worse off.

  • Higher debt would necessitate greater federal spending on interest payments, meaning that larger changes in revenues and noninterest spending would be needed to make fiscal policy sustainable. If those changes took the form of bigger cuts to spending programs, they would be more difficult for people to adjust to than smaller cuts would be. If the changes took the form of bigger increases in marginal tax rates, they would create larger disincentives to work and save, which would reduce incomes more than smaller tax increases would.

  • Higher debt would make it harder for policymakers to respond to unexpected problems, such as financial crises, recessions, and wars.

  • Higher debt would increase the likelihood of a fiscal crisis, in which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable interest rates.
At the same time, waiting to put fiscal policy on a sustainable course could make some current generations better off than they would be otherwise. In particular, a delay would tend to help older generations by deferring the tax increases or cuts in benefit payments and government services that they would face. For certain policies, that gain would outweigh the greater reduction in future incomes and the larger ultimate adjustment to taxes and spending that would result from delay, because the effect of those differences is muted for people who have completed all or part of their working lives. Whether that advantage of waiting would outweigh the costs to older generations from the other effects of higher debt—the government’s reduced ability to respond to unexpected needs and the increased risk of a fiscal crisis) because they would receive higher benefits or pay lower taxes for a number of years. For example, people who were age 60 or older in 2015 would be better off—by an amount equivalent to about 2 percent of their future consumption—if a policy that stabilized the debt-to-GDP ratio by cutting federal benefit payments for all adults was delayed from 2015 to 2025.

The economic consequences of rising federal debt that can be quantified using the analytic approach of this brief would be gradual and modest over the next 15 years, even with the sharp increase in debt projected in this analysis. However, other consequences that are not quantified here could be severe. The point at which investors would lose confidence in the government’s ability to manage its budget and meet its debt obligations is unknown. But rapid growth in debt relative to GDP would increase the likelihood of such a crisis—and it could occur long before the impact of rising debt on output and consumption became substantial. In the meantime, concerns about the possibility of such a fiscal crisis and ever-increasing interest costs on federal debt would limit the government’s ability to respond to unexpected events or meet other pressing needs. Ultimately, the fiscal imbalance will have to be addressed, whether quickly or gradually, and the longer the necessary adjustments are delayed, the more drastic they will need to be.

Read the complete 12-page CBO study here.

Economic Impacts of Waiting to Resolve the Long Term Budget Imbalance

No comments:

Post a Comment