Beyond Sequestration

The next few weeks will undoubtedly witness the old back-and-forth on budget cuts and revenue increases combined with claims that this side won’t bargain and that side won’t bring anything specific to the table.

The CBO’s Budget and Economic Outlook: Fiscal Years 2013 to 2023 suggests that we should not focus on the shiny objects. Assuming that the sequestration occurs (the extended baseline), the news remains bad. After some short-term reductions in deficits, they will once again continue to increase, with publicly held debt reaching 77 percent of GDP by 2023 (a product of  “the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt”).

The CBO provides discusses the ramifications:

Such high and rising debt would have serious negative consequences: When interest rates rose to more normal levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they might ordinarily to use tax and spending policies to respond to unexpected challenges. Finally, such a large debt would increase the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

The CBO report is relatively brief and worth reading in its entirety.