Debt crisis looms absent major policy changes

WASHINGTON – The rapidly growing national debt could soon spark a European-style crisis unless Congress moves forcefully, the Congressional Budget Office warned Wednesday in a study that underscored the stakes for Vice President Joe Biden and negotiators working on a sweeping plan to reduce red ink.

Republicans seized on the report to renew their push to reduce costs in federal benefit programs such as Medicare.

The report said the nation's debt is on pace to equal the annual size of the economy within a decade. It warned of a possible "sudden fiscal crisis" if it is left unchecked, with investors losing faith in the U.S. government's ability to manage its fiscal affairs.

At issue is the $9.7 trillion of U.S. debt held by investors and foreign countries like China, the measure that economists deem most important. Government accounts like the Social Security trust funds account for the rest of the $14.3 trillion total debt.

The study reverberated throughout the Capitol as Biden and senior lawmakers spent several hours behind closed doors. The talks are aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to generate enough support in Congress to allow the Treasury to take on new borrowing.

Biden made no comment as he departed, except to say the group would meet again on Thursday and probably Friday as well.

President Barack Obama plans to meet with House Democratic leaders Thursday to discuss the status of the ongoing talks. The meeting comes as Democrats want the president to rule out Medicare benefit cuts as part of any budget deal.

The CBO, the nonpartisan agency that calculates the cost and economic impact of legislation and government policy, says the nation's rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax increases.

"As Congress debates the president's request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff — a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic," said House Budget Committee Chairman Paul Ryan, R-Wis.

The findings aren't dramatically new, but the budget office's analysis underscores the magnitude of the nation's fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid. Officials said little if any progress was made during Wednesday's session.

With Republicans insisting that the level of deficit cuts at least equal the amount of any increase in the debt limit, it would take more than $2 trillion in cuts to carry past next year's elections. House GOP leaders have made it plain they only want a single vote before the elections.

That $2 trillion-plus goal is proving elusive. And a top Senate Democrat warned Wednesday that it would be insufficient anyway.

"While I am encouraged by the bipartisan nature of the leadership negotiations being led by Vice President Biden, I am concerned by reports the group may be focusing on a limited package that will not fundamentally change the fiscal trajectory of the nation," said Senate budget Committee Chairman Kent Conrad, D-N.D. "That would be a mistake."

Democratic leaders, however, held a news conference Wednesday to argue for more economic stimulus measures such as a proposal floated by the White House to extend a payroll tax cut enacted last year. The move demonstrates the continuing appeal of deficit-financed policy solutions — suggested even as warnings of the dangers of mounting debt grow louder and louder.

"We absolutely need to reduce our deficit. We know that," said Senate Majority Leader Harry Reid, D-Nev. "But economists tell us that reducing spending is only half the equation. The other half is measures to create jobs."

With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, the CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP — the record set in World War II — by 2023.

The CBO's projections are based on a scenario that anticipates Bush-era tax cuts are extended and other current policies such as maintaining doctors' fees under Medicare are continued as well. The debt would far more stable under the budget office's official "baseline" that assumes taxes return to Clinton-era rates and that doctors absorb unrealistic fee cuts.

Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government's ability to respond to unexpected challenges like an economic downturn.

But most ominously, the CBO report warns of a "sudden fiscal crisis" in which investors would lose faith in the U.S. government's ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, the report warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.

"Earlier action would permit smaller or more gradual changes and would give people more time to adjust to them, but it would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations," CBO Director Douglas Elmendorf said in a blog post.