Economist: Federal budget gap is nearly half way closed
CONCORD - Despite the appearance of gridlock in Congress, changes made as part of the debt ceiling extension last summer bring the country about half way toward closing a $4 trillion long-term budget gap, Mark Zandi, chief economist for Moody's Analytics, said Friday.
Congress agreed to cut $900 billion in August as part of the debt ceiling extension and put in place another $1.2 trillion in automatic spending cuts, or sequestration, beginning in 2013 tied to the Super Committee's failure's to come up with an alternative. That's about $2.1 trillion in cuts over 10 years beginning in 2013.
Zandi addressed the first Next-Generation Matters forum co-sponsored by the University of New Hampshire Law School and the Concord Coalition.
Concord Coalition Executive Director Robert L. Bixby said invitations were made to Presidential Primary candidates and so far Newt Gingrich and John Huntsman have accepted in principle, but dates still need to be set.
Congress should extend the 2 percent payroll tax cut for another year, Zandi said.
The 2011 payroll tax cut put about $115 billion in Americans' pockets, he said. The cut was helpful despite most of it going to cover increased gasoline prices, he said.
The chances of a second recession outweigh the extra costs from extending the payroll tax cut, he said. 'If we do falter and go back into recession in 2012, the costs to us as taxpayers would be enormous,' Zandi said. 'Tax revenues would fall, spending will increase as more people become unemployed and go onto unemployment insurance, need food stamps and other income support. Ultimately the costs would be ultimately greater.'
It also makes sense to extend emergency unemployment insurance, which also requires congressional action, despite the fact that some may take advantage of it, adding as much as 0.5 percentage points to the unemployment rate. Most Americans currently out of work can't find a job because for every open position there are four to five unemployed workers. 'In a normal well-functioning economy it would be closer to one for one,' Zandi said.
If policymakers do nothing and let both the payroll tax cut and the emergency unemployment insurance program expire, it will shave eight-tenths to nine-tenths of a percentage point off growth in the gross domestic product (GDP) in 2012, at a time when it is projected to grow just 2 percent. The hit would be most pronounced in the first half of the year when the economy is at its most vulnerable, he said.
Zandi said the $1.3 trillion in temporary tax cuts and spending increases from federal fiscal Stimulus beginning with the 2008 rebate checks to taxpayers and including the Recovery Act did their job of ending the recession and putting the country back on a path toward growth.
Zandi also noted the Bush tax cuts are set to expire at the end of 2012 without additional action by Congress, which will raise $3.5 billion in revenues over 10 1/2 years.
'If policymakers reasonably follow through on current policy we will achieve fiscal sustainability under reasonable economic assumptions. Budget deficits will narrow to the point where the nation's debt to GDP ratio will stabilize. That's sustainability,' Zandi said.
Concord Coalition director Bixby offered a slightly less rosy assessment of the nation's fiscal status but expressed optimism that 'whatever problems we have are quite solvable.'
'Deep as the economic problems are, the political problems seem to be worse,' Bixby said. 'So it's our political dysfunction seems to be a deeper problem than our economic distress.
'What's being tested now is the ability of our political system to deal with them,' he said.
'We tend to run deficits at around 2.5 percent of GDP, and if your economy is growing by about that much, 2.5 or 3 percent, then you have a sustainable situation,' Bixby said. 'It's when your budget deficits are growing faster than your economy that you begin to increase your debt to GDP ratio and that if its growing fast enough is ultimately going to become an unsustainable problem,' Bixby said.