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CBO sees government benefits swamping economy

Jun 22, 2011, 9:47 a.m.

By Donna Smith and Richard Cowan

WASHINGTON (Reuters) - The United States will find little relief from its bleak long-term fiscal outlook so long as growing federal healthcare and retirement programs gobble up more and more of the country's resources, said a new economic report issued on Wednesday.

The findings by the non-partisan Congressional Budget Office came as the Obama administration and Congress were struggling to find ways to make ends meet amid $1.5 trillion annual budget deficits and a national debt that, at $14.3 trillion, is seen as posing a danger to the nation.

"The aging of the population and the rising cost of health care would cause spending on the major mandatory healthcare programs and Social Security to grow from roughly 10 percent of GDP today to about 15 percent of GDP 25 years from now," CBO said in an annual report.

By comparison, CBO noted, total federal spending, excluding interest payments on the debt, has averaged about 18.5 percent of GDP over the past 40 years.

"CBO's new long-term budget outlook again highlights the urgency of reaching agreement on a bipartisan and comprehensive long-term deficit and debt reduction plan," Senate Budget Committee Chairman Kent Conrad said. He has been calling for about $4 trillion in long-term savings through a mix of spending cuts and tax increases.

Vice President Joe Biden and a bipartisan group of six lawmakers were to continue their negotiations on Wednesday on how to achieve enough in deficit reductions to clear the way for Congress to raise U.S. borrowing authority.

Republicans in Congress have called for a major revamp of the Medicare healthcare program for the elderly -- one that would basically privatize it with government vouchers to help cover some of the costs.

House Budget Committee Chairman Paul Ryan, the author of the Republican Medicare plan, said the CBO report underscored that the United States was headed to an "economic crisis" that "is actively hurting job creation today, as businesses hold back on expansion out of concerns that we are headed for a future of massive tax increases and higher interest rates."

But there has been a political backlash against Ryan's Medicare plan, as it is projected to cost seniors about $6,000 more in healthcare costs annually.

Democrats, including President Barack Obama, acknowledge the need for some Medicare reforms. But in deficit-reduction talks that Biden has led since May, Democrats have put more emphasis on a combination of cutting or freezing other domestic programs coupled with select tax increases on the wealthy.

SOME OPTIMISM FOR SHORT-TERM

Unless Washington gets control of its deficit spending over time, economists worry the United States will have to pay sharply higher borrowing rates as its AAA credit rating and reputation as a rock-solid investment haven are undermined.

To keep deficits and debt from climbing to unsustainable levels, CBO said, "Policymakers will need to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches." Similar recommendations were made last December by a presidential commission.

CBO had some optimistic words for the short-term. "As the economy continues to recover and the policies adopted to counteract the recession phase out, budget deficits will probably decline markedly in the next few years," the budget analysis agency for Congress concluded.

But for the long-run, there was no such optimism.

CBO said that its economic and fiscal projections "understate the severity of the long-term budget problem" because they don't take into account the snowballing effects that growing debt will have on the economy or the impact of any tax increases, which could occur if Congress does not extend current low rates beyond their 2012 expiration.

The Biden group is hoping that within the next few days it can present the outlines of a deficit-reduction plan to Obama and Congress and thus clear the way for raising U.S. borrowing authority before August 2.

That is when the Treasury Department says it will run out of tools for paying its debts and government programs.

But with deep divides between Republicans and Democrats over Medicare and taxes, there is some speculation that the Biden group might have to seek a short-term debt limit increase while negotiations continue.

(Editing by Jackie Frank)

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