The Congressional Budget Office (CBO) fired off a warning Tuesday to our nation and its leaders in Washington. The CBO told us that the United States of America is headed toward a fiscal cliff and that we do indeed fall off, it will have profound effects on our country and world economy.
The CBO projects that if Congress does not act to prevent coming tax increases and spending cuts, a recession is certain. The CBO estimates gross domestic product would decline by as much as 1.3 percent if lawmakers don’t act.
Unfortunately, the CBO makes it seems as if fiscal restraint is at odds with economic growth. I'll have more to say on that topic in a moment but first let’s take a look at what the CBO says will happen if Washington doesn’t get control of our dire fiscal situation.
Outside of the dip in economic output it predicts for next year, it would seem the CBO believes the nation’s economic future relies on getting our debt under control -- that's because we face even more painful tax hikes or spending cuts in the future, and a crushing interest burden, if Washington does not act now.
The CBO argues if our debt continues to grow, it would “increase the likelihood of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would lose its ability to borrow at affordable rates.”
Also, the CBO warns: “Higher amounts of debt would necessitate higher interest payments on the debt, which would eventually require either higher taxes or a reduction in government benefits and services.”
The statistics are dire: since January 2009, we have seen a 47 percent increase in our debt and for the last three years the country has overspent more than $1 trillion every year.
The CBO itself has estimated that the U.S. is on pace to overspend by another $1.2 trillion this year. Then there is the fact that this overspending has resulted in the U.S. borrowing money from countries, like China.
Finally, over the next five years our country is projected to spend over $1.5 trillion just on interest -- the U.S. must eventually pay this burden, which means fewer dollars for everything from education spending to highways.
As a nation, we are in this mess because of our leaders in Washington. Their inability to work together and find sustainable fiscal path for this country caused our nation’s credit to be downgraded, and it will cause deeper and more devastating recessions in the future if left unchecked.
So what needs to be done?
First, Congress must pass a budget.
America's families have had to sit down, look over the family finances and cut back over the last several years. Americans know that it’s much easier to successfully practice fiscal restraint when you have an outline of what you can spend. A budget shifts a family’s mentality -- and it would do the same for our lawmakers in Washington.
It has been three years since the Senate has passed a budget and lawmakers' efforts to even try to get to a budget have been nothing but political gamesmanship.
Second, Congress must stick to a path that cuts spending responsibly. As a percentage of gross domestic product, spending has increased over the past few years and our economy is no better off than we were when we were spending a smaller ratio.
Finally, policymakers cannot make average Americans, and American businesses, pay for Congress’s past spending mistakes.
The CBO is right when it says that tax increases would have a profound economic effect. More dollars to the federal government means fewer dollars to invest back into businesses, or to hire new workers.
As the CBO wisely points out dealing with our increasing national debt and persistent deficits requires trade-offs. Where I take issue with the report is the idea that economic growth and fiscal restraint are mutually exclusive.
The CBO is entirely correct to warn lawmakers about the economic effects of its actions -- or inactions. But the risk does not come from fiscal restraint, the risk comes from not acting to prevent the U.S. from falling off the cliff.
Gretchen Hamel is executive director of Public Notice.