Current laws would slash federal deficit, analysts say

Reporting from Washington —  Here’s one way Congress can trim the nation’s record deficits: Do nothing.

Keeping Congress gridlocked on budget issues would cut the projected annual federal deficit in half by the next fiscal year and set the trend on a downward path for years to come.

Legislation already on the books, if left alone, would do several things: Tax cuts passed under President George W. Bush’s administration would expire Dec. 31, generating more revenue. And deep budget cuts passed as part of last summer’s debt ceiling deal would be automatically triggered, slashing spending in 2013.

Pain would come with the progress, however. If Congress agreed to let such politically difficult choices stand, the short-term effect would curtail the nation’s modest economic growth. The unemployment rate would rise back above 9% next year, a result of substantial reductions to the federal workforce and sluggish demand, according to the latest report from the Congressional Budget Office.

This is the Catch-22 facing Congress and driving the presidential campaign. Tea party members want to reduce government spending. Democrats want to raise taxes on the affluent. And economists warn that sudden budget cuts or tax increases can damage a recovering economy. How lawmakers balance the competing interests will be at the crux of the debate that has become the nation’s defining domestic issue.

“On the one hand, if policymakers leave current laws unchanged, the federal debt will probably recede slowly,” said Douglas W. Elmendorf, director of the CBO, in releasing the annual Budget and Economic Outlook for the next decade.

“On the other hand, changing current laws to let current policies continue … would boost the economy and allow people to pay less in taxes and benefit more from government programs in the next few years — but put the nation on an unsustainable fiscal course.”

One thing is certain, the CBO advised: Making decisions sooner rather than later is preferable, even if lawmakers agree to phase in the changes over time to soften the damage.

“There’s no substantive advantage to waiting to decide what policy changes we will make,” Elmendorf said Tuesday. “To the contrary, the longer we wait as a country to make the sort of choices that we have to make, the harder it will be to make them, because more debt will have accumulated and people will have less time to plan how they will react to the various changes.”

Although the issues covered in the CBO report are driving the national debate on and off Capitol Hill, they have not spurred lawmakers to act. Substantive action isn’t expected until a lame-duck session of Congress after the November election.

Party leaders wasted no time cherry-picking from the report. Republicans said the gloomy economic outlook represented the failed policies of President Obama, who took office amid the most significant economic downturn since the Depression.

“This president inherited a bad situation and he has made it worse,” said Sen. John Barrasso of Wyoming, a member of the GOP leadership.

Democrats argued that raising taxes on wealthier Americans must be part of any deficit reduction strategy.

“We have to get our fiscal house in order by reaching a big and balanced deficit reduction plan this year,” said Rep. Steny H. Hoyer of Maryland, the No. 2 Democrat in the House. “Such a plan requires both getting a handle on spending and raising revenue.”

But even if Congress leaves the tough laws on the books this year — thereby halving the projected 2012 deficit of $1.1 trillion — the gain would be short-lived, the CBO said. Raising taxes and cutting spending alone cannot solve the problems of the nation’s $15.2-trillion debt load.

By the middle of the decade, deficits would begin to curve upward again, largely as a result of an aging population and the related costs of Medicare and Social Security.

Resolving that issue is what Elmendorf called the “fundamental challenge.” The GOP has proposed offering the next generation of seniors a fixed-price stipend to buy private health insurance — a proposal from Rep. Paul D. Ryan (R-Wis.) that was panned by much of the public and used as a Democratic campaign issue against Republicans who supported it.

The nation’s gross domestic product is projected to grow by 2% this year — better than in the recent past — but the economy is only about halfway through the effects of the downturn, the report said.

Douglas Holtz-Eakin, a former CBO director who has advised Republicans, suggested that members of Congress brace themselves for the inevitable year-end budget battles.

“Deep breath,” he said. “December could be quite ugly.”

lisa.mascaro@latimes.com