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The CBO lays out the harsh reality

January 26, 2011 | 12:59 pm

CBO report The nonpartisan Congressional Budget Office released its latest, discouraging projections about the economy and the federal budget Wednesday morning, predicting tepid GDP growth and high unemployment rates for the next two years. No real surprises there; the CBO had said similar things in August. What was new was the projection for the fiscal 2011 deficit: $1.5 trillion.

That's half a trillion dollars more than the CBO projected last August. And at 10% of GDP, it's just about as large as the deficit in President Obama's first year in office, when the economy was still contracting. The biggest difference between August's analysis and the current one is the tax breaks Obama negotiated with congressional Republicans late last year, which the CBO projects will boost the deficit by $354 billion.

Largely because of the tax cuts, the CBO estimates that the government will collect $409 billion less in taxes in the coming year than it had projected in August. But it's still expecting that the growing economy will push tax revenue up slightly in 2011 compared to the previous year.

So if revenue is expected to grow, why is the deficit expanding? One factor often cited by Republicans is the $148 billion in economic stimulus spending slated for 2011, the final year of the package adopted in 2009. Yet because of cuts in other areas, nondefense discretionary spending (including the stimulus) is expected to increase only $3 billion overall, or 1.9% -- barely faster than inflation and hardly enough to cause the burgeoning deficit.

The real culprits on the spending side are rapid increases in spending on entitlement programs, particularly Medicare, and on servicing the growing federal debt. The former is projected to grow 10%, the latter 14%. Together they are expected to add $142 billion more to the deficit than they did in 2010; nondefense discretionary spending is expected to add only $3 billion.

The CBO's data support two other conclusions. First, returning to 2008 spending levels for "non-security" programs, as House Republicans have advocated, would be a dramatic cut in percentage terms -- possibly 20% -- but it would narrow the budget gap by less than 7%. That's because those programs make up less than one-fifth of the dollars spent by Washington. Social Security, the Pentagon and healthcare benefits for the elderly and the poor all consume larger chunks of the budget.

Second, the economic growth predicted by the CBO, although unimpressive, would still help to shrink the deficit dramatically from 2012 through 2014 if current laws remained in place. But that's an unrealistic assumption, as the CBO points out, because it's based on lawmakers allowing deep cuts in Medicare reimbursements to take effect and the Bush-era tax cuts to expire. Keeping the Medicare reimbursements at their current levels would almost double the deficits over the coming decade, the CBO estimated.

That's another way of saying that healthcare costs are the single biggest problem, and controlling Medicare costs will be a key part of the solution. Obama talked a fair amount about the deficit and debt problems in his State of the Union address Tuesday, but he made only a passing reference to Medicare. Reps. Paul Ryan (R-Wis.) and Michele Bachmann (R-Minn.) who made the budget the centerpiece of their responses to Obama, didn't even mention it.

RELATED:

Mixed reaction to Obama's State of the Union address

Doyle McManus: That old familiar SOTU

State of the Union: Austerity and innovation

-- Jon Healey

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