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Federal budget faces tough short- and long-term balance

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The next federal budget will have to weigh the medium and long-term deficit reduction of tax increases and spending cuts against their short-term impact on economic output and job creation, says Congressional Budget Office Director Douglas Elmendorf.

Speaking at a Feb 12 hearing of the Senate Budget Committee, Elmendorf said all solutions to current economic problems must be thought of in both short-term and long-term consequences. 

He said that if short-term economy boosting measures such as tax cuts or an increase in federal spending aren't offset by later fiscal tightening, then "the extra debt that is accumulated will be a drag [on the economy] in the long run."

Recent CBO analysis projects the federal budget deficit will fall to $845 billion in 2013 under current law, but will slowly rise to more than $1 trillion later this decade.

Elmendorf said two fundamental drivers of current federal spending and deficits are the number of Americans receiving assistance from beneficiary programs and the rising cost in healthcare services per person.

When responding to a question about CBO budget projections through 2023 and the current status of Medicare and Social Security, Elmendorf said it is "very difficult to see how one could put the budget ultimately on a sustainable path without making significant changes in either of those large benefit programs or in taxes paid by a broad cross-section of Americans."

Elmendorf told Chairwoman Patty Murray (D-Wash.) that the coming sequestration could be replaced by a set of phased-in cuts and still have the same beneficial impact on the deficit and debt if they were off the same total decrease, but he declined to offer suggestions on smarter cuts, saying the CBO does not make policy recommendations.

"Your report makes clear that the economy still faces significant headwinds in the short term, particularly from the tightening of federal fiscal policy," said Murray.

Elmendorf said that the CBO's latest report does project gross domestic product growing by only 1.4 percent in 2013, a slow increase that he attributes partially to current federal fiscal policies, but says that the GDP growth will climb to 3.5 percent for 2014 through 2018.

However, he warned, under current policies debt will increase relative to the size of the economy in the second half of the period of 2014 to 2023.

For more:
- go to the hearing's webpage for testimony and an archived video

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