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1 William McBride, CBO Overly Optimistic about Economic Growth and the Federal Debt 1 (2013)

handle is hein.taxfoundation/ffdfixz0001 and id is 1 raw text is: February 12, 2013 No. 358 CBO Overly Optimistic about Economic Growth and the Federal Debt By William McBride, PhD Introduction The Congressional. Budget Office's (CBO) latest projections of budget and economic conditions over the next ten years indicates the economy will grow slowly this year at a 1.4 percent rate after being adjuLsted for inflation. CBO attributes the short term slowdown to the recent fiscal cliff deal that raised tax rates and the Budget Control Act that will reduce spending beginning March 1. In subsequent years, CBO expects these fiscal drags to dissipate and the economy to recover at a faster pace, due largely to a rebound in the housing market. However, the higher tax rates are here to stay, and CBO has apparently failed to account for the extent to which these tax increases will reduce long term investment, hiring, and work. As it is, CB( expects the budget deficit to shrink this year to $845 billion, or 5.3 percent of GDP, which would be the first deficit under $1 trillion since 2008. They expect deficits to continue shrinking to about 2.4 percent of )GDP by 2015 and to grow after that, reaching 3.8 percent ofGDP in 2023. They expect publicly held debt to reach 76 percent of GDP this year, fall to 73.1 percent by 2018, and then continue on an. upward trajectory, reaching 77 percent of GDP in. 2023. CBO is right to point out that these would be the highest U.S. debt levels since the years immediately following World War 11 and that the various dangers Of such indebtedness include an interest rate spike that would precipitate a fiscal crisis and. even default. However, it could be worse and. likely wxill be. Under the CBO's alternative scenario, which, assumes current policy will. continue and that automatic spending cuts wviii not go into cffect on March 1, thc debt to GDP ratio reaches 87 peent by 2023. Further, as will be demonstrated, CB() likely overestimates long-run economic growth and new tax revenue .resulting from. recent increases in tax rates, This means defieits will iikely be larger and debt wviii likedy exceed the 77 to 87 percent range fobreseen by CBO. 1 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2013 to 2023 (Feb. 2013),

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