CBO Issues Warning on the ‘Fiscal Cliff’

By on November 8, 2012 in Pay & Benefits with 40 Comments

A new report from the Congressional Budget Office outlines the consequences of the country hitting the much talked about “fiscal cliff.” The report also offered numerous deficit reduction strategies to help avert the potential crisis, a couple of which would apply to the federal workforce.

Just how bad is the debt?

The current federal debt held by the public currently exceeds 70% of GDP, a percentage not seen since 1950. The CBO said that if lawmakers maintain current policies, annual deficits would average nearly 5% of GDP annually and debt held by the public would increase to 90% of GDP.

One of the biggest strains of the federal budget is spending on mandatory spending programs, namely Social Security, Medicare, and Medicaid. These programs, coupled with an aging baby boomer generation that is demanding more and more of the services provided from these programs, are creating an alarming financial strain on federal spending.

One of the more telling charts in the report shows two potential fiscal paths the country can take. The rosier of the two, the extended baseline scenario, adheres closely to current law, following CBO’s ten year baseline budget projections through 2022.

The more ominous path (the extended alternative fiscal scenario) incorporates the assumptions that all expiring tax provisions (other than the payroll tax reduction), including those that expired at the end of December 2011, are extended, that the alternative minimum tax is indexed for inflation after 2011 (starting at the 2011 exemption amount), that Medicare’s payment rates for physicians’ services are held constant at their current level, and that the automatic enforcement procedures specified by the Budget Control Act of 2011 do not take effect. The chart speaks for itself as to what the two scenarios do to the projected level of debt.

Chart showing two debt path projections

What are the consequence of rising federal debt?

The CBO names four key problems:

  • Higher federal spending on interest payments
  • A reduction in national saving
  • Limits on policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns, natural disasters, or financial crises
  • An increase in the likelihood of a fiscal crisis, in which investors would lose confidence in the government’s ability to manage its budget, and the government would thus lose the ability to borrow at affordable interest rates

All of this leads up to CBO’s recommendations for how to tame the spending problem. The report states:

The United States cannot sustain the federal spending programs that are now in place with the federal taxes (as a share of GDP) that it has been accustomed to paying. To put the budget on a path that is more likely to be sustainable than if current policies were continued, lawmakers will need to adopt a combination of policies that require people to pay more for their government, accept less in government benefits and services, or both. However, making policy changes that are large enough to shrink the debt relative to the size of the economy—or even to keep the debt from growing—will be a formidable task.

The report makes many recommendations in a number of areas. Some of them include:

  • Raising the ages at which people qualify for Social Security benefits
  • Repeal provisions of ObamaCare that expand health insurance coverage while leaving other provisions of the law unchanged
  • Allow the automatic cuts in the Budget Control Act to take effect
  • Reduce funding for National Institutes of Health
  • Increase payments by tenants in federally assisted housing
  • Increase fees for aviation security

Federal employees should take note of two of the CBO’s recommendations in particular which would directly affect the federal workforce. Specifically, the CBO suggests the following:

  • Reduce the across-the-board adjustment for defense and non-defense federal civilian employees’ pay
  • Adopt a voucher plan and slow the growth of federal contributions for the Federal Employees Health Benefits program

Taken together, these two items represent approximately $15 billion in potential deficit reduction savings in 2020.

Neither of these ideas are new and have been pitched before. Ralph Smith noted in his article earlier this week that the change to the FEHBP has been proposed before and what it might look like for federal workers.

President Obama has arguably already adopted the across-the-board pay reduction proposed by the CBO since he proposed the pay freeze in 2010 (which was enacted by Congress and put in place for the last two years), and he has proposed only a 0.5% pay raise for federal workers in 2013.

Something has got to give eventually; the spending and the rate at which the federal deficit is expanding is simply not mathematically sustainable as the CBO report helps to illustrate. It’s likely we will eventually see some form of spending cuts at the federal level, but what remains unknown is what those will ultimately be.

© 2016 Ian Smith. All rights reserved. This article may not be reproduced without express written consent from Ian Smith.

About the Author

Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce. Ian also has a background in web development and does the technical work for the FedSmith.com web site and its sibling sites.

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  1. ZZdeog says:

    I would like to see where congress (or other politicians) are going to give up perks of their positions.  At work if I don’t get something done on time I would be written up and if I didn’t get a project (budget) completed on time and it impacted the United States…….I WOULD BE FIRED…no questions asked.

  2. $15300432 says:

    At the same time we are struggling with spending the barak administration through Homeland security has their website outlining benefits that illegals can qualify for ad holding meetings in Mexico so that the govt gets the word out to their citizens that may choose to violate US borders

  3. The Master says:

    “One of the biggest strains of the federal budget is spending on mandatory spending programs, namely Social Security, Medicare, and Medicaid.”
    This is bogus. SS and Medicare are paid for by their respective taxes and not by the general revenues of the government. In fact, the general budget has taken over $2.5trillion from SS surpluses over the years.

  4. chjstens says:

    Puhleeze. The federal payroll is the proverbial drop in the bucket. Military spending boondoggles on unwanted, unneeded, and often obsolete equipment alone make the federal payroll nearly insignificant. There are better ways to cut without demoralizing the entire workforce. 

  5. Badfed says:

    Barry Obama:  There’s plenty of money!  We still have ink, paper and printing presses.  

  6. po1990 says:

    Is that why he later backed away from the comments?  Or perhaps that was also a result of audio manipulation.  Regardless, even without the comment, I could find very little about his policy proposals or his positions that made him more favorable to me and I actually listened.  We obviously arrived at different conclusions.

  7. HDandIT says:

    No, it would not be cost efficient.  I am a 30% disabled vet.  I can get free care from the VA only for those things that are attributed to my service connected disability.  How could they give me insurance to only cover my spine and right arm?  But the free care is worth every penny.  I spent 6 months trying to get help for my neck then finally went to my civilian doctor.  I had surgery within 4 weeks of the first appointment.  The surgeon charged $70k for the surgery, and he did 4 that day.  My insurance only paid $8k.   I know the VA does not pay their surgeons $32k a day.  Actually the government could save money by opening more hospitals and making all of the medicare and medicaid patients go to the government hospitals. 

  8. MomCrazy says:

    Let’s start with forgoing all the pomp and circumstance that goes with swearing the President in (again).  This costs a lot, when Clinton was sworn in a second time the concept was raised, let’s now act on it…  Gotta start somewhere and not just talk about it.  Acta non Verba.

    • realtat says:

      Maybe we could just declare taking oaths out of date for presidents who lie every time they speak.

      • D Byte says:

        G-d will remember the fabricated Iraq war and the 4488 dead soldiers.

        • realtat says:

          Are you saying that the debt came from the Iraq War that so many Democrats and Republicans voted in? Isn’t it pretty generally agreed that the biggest debt problem is entitlements?

  9. danny camp says:

    This is only a problem because of those 12 Federal Reserve Banks ( Privately owned) that charge us interest on our own tax money, plus out of control spending by the President, Congress and the Senate like there is no tomorrow. It is way past time to put our fiscal house back in order and it starts with getting rid of the Federal Reserve System, citizens holding our elected leaders feet to the fire when it comes to unnecessary spending such as aid to foreign countries, aid to corporations and the President/VP, Congress and Senate with their spending practices for their staffs etc. It also starts with over the top taxes, HISTORY has shown that whenever citizens have more disposable income they spend it on new cars, houses, refrigerators/TVs etc and some manage to invest and save which drives an economy.

    Whenever fewer people are working as now with almost 30% unemployment and another 20% which are underemployed it puts an enormous strain on businesses to downsize when they should be hiring. With more people working more money is taken into tax coffers of local, State and Federal thus providing for those who CANNOT provide for themselves. See we now have way too many people who feel entitled to handouts even if they can work, it is beneath them to work especially since they can go and get assistance.

  10. ticked off says:

    damn- why not just close the veterans hospitals
    my husband is a 100% disabled vet
    there is no need for the veterans to have to go to the va
    allow our veterans to go to the doctors/ hospitals of their choice
    why are we wasting so much money on this type of healthcare
     this is the best way to  for us to pay our debt back

  11. steve5656546346 says:

    “However, making policy changes that are large enough to shrink the debt relative to the size of the economy—or even to keep the debt from growing—will be a formidable task.”

    No, it is now an impossible task.  Last Tuesday, the American people spoke:  unless we dramatically cut spending, we can seize every penny of the 1% or even 10% and it will not be enough–and the American people decided not to dramatically cut spending.  As time goes on, the cuts would have to be more and more dramatic:  draconian.  If we will not agree to significant cuts now, we will not agree to draconian cuts later.

    • realtat says:

      It’s scary out there. Is there any serious thought that the election was stolen? I cannot find it online so far. It is hard to believe that we actually voted this upon ourselves. Personally, I am not suicidal, yet I am part of a nation that is. Is there any truth to the rumor that Trump offered $5 million to anyone who can prove that the election was stolen?

      • po1990 says:

        Why is it easier to believe that there may be some vast conspiracy rather than the simple fact that when faced with the option of Obama v. Romney, more people chose the President whether you agree with his policies or not?  If you think your lot in life was going to improve with Romney, you are living in a fantasy world or you were not listening to the many versions of what Mr. Romney might have implemented.  There is no easy way out of this mess, but I prefer a candidate who does not put a target on 47% of the population as part of his grand plan.

        • realtat says:

          I see that you heard the audio chop version of what Romney said. The words pasted together in the chop were on 3 different topics. He was referring to Obama voters who were pretty much already decided but that got pasted together with comments on the economy and on China so that people like you heard a message the Dems wanted to put out. It’s awful the way information is manipulated. We talk about low information voters, but what about low tech voters who cannot recognize a chop?

          • $31427826 says:

             There was no chopped version of the 47% talk.  If there was, don’t you think Romney would have played the entire version or do you really think he was that stupid?  I did vote for Romney, but with some serious reservations.  He would not detail his proposed tax plan and still wanted the top 1% to have lower rates along with the capital gain reduction which was riduclous.

          • realtat says:

            I heard the full quotes from which the chop was taken, but it was on a right wing radio show, and I cannot recall which one now. I just heard it in the car. Of course, that could have been the chop, rather than the one played on government supporting media. I have no faith at all in either side in the press. If you know of any media source that is morally above things like chops, pls let me know. As for why Romney didn’t reply, I think he tried to run a high toned campaigned focused on issues not slurs, and I think everyone knows these things are out there on both sides. I don’t think Obama replies to such tactics either. He also did not push the Benghazi scandals when he might have. 

            You might note that it is difficult to prove that something does not exist. Yet you say “There was no chopped version of the 47% talk.” Have you got any proof?

          • realtat says:

            Romney explains that 47% remark without reference to any chop.


          • maturity says:

            you know it was Jimmy Carter’s grandson who recorded Romeny at that event regarding the 47%…nuff said.

          • $31427826 says:

             and your point is………..