The CBO is trying to show Congress that not only do they need to control the mounting debt, but they also need to help promote the growth of the United States economy, which the CBO believes will be modest for the next few years.
By Jeanne Sahadi
August 25, 2011: 3:11 PM ET
NEW YORK (CNNMoney) -- It's easy to read the latest budget outlook from the Congressional Budget Office as further proof that the United States really needs to get serious about dealing with the national debt.
But if that's all that lawmakers take away, they will have missed a big point.
The CBO is not in the business of telling Congress what to do. But it is in the business of showing Congress how what it chooses to do may affect the country's economic future.
One of the big lessons in the latest CBO analysis is that lawmakers should tread carefully when deciding how to tamp down debt so as not to unduly upend economic growth.
The CBO believes economic growth in the next few years will be modest. That's assuming three big things: the Bush-era tax cuts would expire, resulting in bigger tax bills; spending cuts would be enacted as per the recently passed Budget Control Act; and stimulus measures -- such as extended unemployment benefits -- will have run out.
If all that comes to pass, the agency estimates that growth in 2013 would be between 1.5% and 3.5% lower than would otherwise be the case.
That's not surprising. Given the already slow economic recovery and the fact that interest rates can't fall much farther, "reductions in government spending or an increase in taxes ... will slow economic growth and reduce employment," CBO director Douglas Elmendorf said in a meeting with reporters.
At the same time, letting the debt grow unbridled can also hurt future economic growth.
So what's a partisan-driven policymaker to do? Don't be a slave to ideology and apply a little finesse to your task.
"It's possible to structure deficit reduction in a way that does not have as large a dampening effect on output and employment in the near term while still achieving significant deficit reduction over the decade and the longer term," Elmendorf said. "That amounts principally to having the policy changes take place later."
That is, policymakers could support near-term economic growth by increasing spending (or at least not cutting it) and lowering taxes (or at least not raising them).
The potential negative effects of those policy actions on the debt could be offset or more than offset so long as they are simultaneously paired with measures that impose medium- and long-term fiscal restraint -- namely lower spending and higher tax revenue, he explained.
Finesse will also be required when it comes to choosing which types of belt tightening to enact. That's because not all spending cuts (or tax hikes) are created equal.
"The composition of the policy actions to narrow the budget deficit can matter a great deal to the future state of the economy and also, of course, matter a great deal to what sorts of public and private goods and services this country has," Elmendorf said.
For example, raising tax rates may discourage work and savings. But increasing revenue by ending some tax breaks may have a positive effect on the economy. That's because people will base decisions more on the economic merits of a move rather than on whether it's deductible.
Similarly, some spending cuts will reduce consumption while others will reduce investments in the economy.
There's no perfect formula for how to get all of this right. But there is one unambiguous way lawmakers can support economic growth, Elmendorf suggested. Laying out a long-term fiscal path sooner rather than later.
"Uncertainty about government policy is not helpful for encouraging household spending, business investment ... and decisions to hire. Earlier resolution of how fiscal policy will play out will be good for economic growth."
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