U.S. must cut $2 trillion over 10 yrs to stabilize debt: CBO

WASHINGTON Tue Sep 17, 2013 5:06pm EDT

WASHINGTON (Reuters) - U.S. lawmakers are far from finished with the job of deficit-cutting, the Congressional Budget Office warned on Tuesday, saying that $2 trillion in additional savings is needed over the next 10 years just to stabilize long-term U.S. debt.

In new long-term forecasts that will intensify the fiscal debate in Washington as critical deadlines loom, the CBO said U.S. public debt will balloon to 100 percent of the nation's economic output in 25 years if no action is taken, increasing the risk of another financial crisis.

That's up from about 73 percent this year and a 40-year historical average of about 38 percent. And the picture looks worse if Congress does away with the "sequester" across-the-board spending cuts now in place, the non-partisan CBO said.

Revenue growth from a recovering U.S. economy and a January tax increase on the wealthy are helping to shrink near-term deficits, but this is not enough to overcome the rising pension and health care costs associated with the aging Baby Boom generation, CBO director Doug Elmendorf said.

"The bottom line remains the same as it was last year. The federal budget is on a course that cannot be sustained indefinitely," Elmendorf told a news conference.

In order to cut U.S. debt levels significantly, CBO said it would take an additional $4 trillion worth of cuts over the next decade. That would shrink U.S. public debt in 2038 to 31 percent of gross domestic product (GDP), below the 40-year average.

While the deficit is still forecast to fall from around 4 percent of GDP this year to a sustainable 2 percent in 2015, it will then start rising again. CBO projected that with no changes in tax and spending laws, the deficit will reach almost 3.5 percent of GDP by 2023 and hit 6.4 percent by 2038. Public debt will make a similar dip to 68 percent in 2018 before rising again.

The latest forecasts come as lawmakers race against a September 30 deadline to pass new government spending authority to prevent a government shutdown. Congress also faces a mid-October deadline to raise the $16.7 trillion federal debt limit to avoid a potential default that would roil global financial markets.

The deadlines have also become intertwined with Republicans' desire to delay or defund "Obamacare" health insurance reforms, several of which are due to launch on October 1. House Budget Committee Chairman Paul Ryan wasted no time in pinning part of the deficit blame on President Barack Obama's signature health care law.

"The report reiterates the obvious: government spending, especially on health care, is driving our debt. And Obamacare will not solve the problem. The law was a costly mistake," Ryan said in a statement.

Chris Van Hollen, the top Democrat on the House Budget Committee, acknowledged the need for further work to reduce deficits, but accused Republicans of "threatening to shut down the government" over their demands to defund or delay Obamacare.

TURNING OFF SEQUESTER

Democrats' top priority is to turn off the sequester automatic cuts that are now hitting discretionary programs from the military to education.

But the CBO includes those cuts - about $1.2 trillion over a decade - in its long-term forecast, so canceling them without offsetting savings would worsen the deficit and deficit outlook significantly.

The report presented an alternative scenario which includes turning off the sequester and other planned spending cuts, but this would cause public debt by 2038 to hit 190 percent of GDP. That's worse than crisis-wracked Greece's current level of around 160 percent.

The extended higher debt levels would reduce economic growth, consume more revenues to pay interest, and increase the risk of a future financial crisis, the CBO said.

Should Congress fail to raise the debt limit, Elmendorf said that the United States could begin defaulting on its obligations between the end of October and mid-November. He said that the Treasury Department's own estimate that it will run out of borrowing capacity by mid-October, with a $50 billion cash balance "seems plausible to us."

That means Treasury will start to run short of cash to pay obligations starting around the end of October, but the timing depends partly on the strength of revenue collection, he said.

(Reporting by David Lawder; Editing by James Dalgliesh, Krista Hughes and Vicki Allen)

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