Budget outlook said bleak as baby boomers age

WASHINGTON (Reuters) - Lawmakers will need to pare spending on Social Security and healthcare in order to avoid tax hikes or big cuts in other federal programs, a congressional budget analysis said on Wednesday.

Federal healthcare spending and the Social Security retirement program will gobble up a greater portion of the budget and push the national debt up sharply unless lawmakers act, the non-partisan Congressional Budget Office said.

The CBO said spending on Social Security and Medicare and other healthcare programs will rise to about 16 percent of the economy currently from 10 percent in 25 years. By comparison, spending on all government programs, excluding interest payments, has averaged only about 18.5 percent of gross domestic product over the past 40 years, it said.

The stark outlook was highlighted by CBO Director Douglas Elmendorf in testimony on Wednesday to a commission charged with finding ways to reduce the $1.4 trillion federal deficit and U.S. long-term debt. President Barack Obama has asked the panel to make recommendations in December.

The CBO report said long-term deficits and the accumulation of debt would have a negative impact on the economy, lowering income growth and eroding investor confidence in the U.S. government’s ability to manage its budget. That would push interest rates higher, the report warned.

Federal spending and the $13 trillion debt are major issues in the run-up to the November congressional elections in which Republicans hope to take control of Congress away from Democrats.

The battle over the deficit and debt is jeopardizing Obama’s plan to sustain the fragile economic recovery and boost job growth. Legislation supported by the administration that would extend unemployment benefits for the long-term unemployed and renew a set of popular business tax breaks stalled in the Senate last week in a partisan battle over deficit spending.

Republicans blame the slow economy on record deficits and debt, while Obama and his fellow Democrats argue that slashing spending too soon could choke off the fragile recovery.

“One of the challenges we face is that we must be careful not to disrupt the nation’s economic recovery as we pivot to deficit reduction,” said Senate Budget Committee Chairman Kent Conrad, a member of the deficit commission.

“What we can and must do is put in place policies now that will only kick in after the economy has more fully recovered,” he added.

In his testimony to the bipartisan panel, Elmendorf drew a distinction between short-term government borrowing when the economy is weak and long-term sustained deficit spending. He said that short-term extension of tax breaks and deficit spending could be offset by spending cuts and revenue increases after the economy recovers.

The CBO urged quick action on tackling the long-term budget outlook.

“The sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt,” CBO concluded.

The first wave of about 78 million U.S. baby boomers has become eligible to receive early Social Security retirement benefits, and the numbers of those receiving Social Security and Medicare health benefits will steadily rise in coming years.

Reporting by Donna Smith; Editing by Kenneth Barry