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Headshot of Jeffrey Simpson. (Brigitte Bouvier/Brigitte Bouvier/For The Globe and Mail)
Headshot of Jeffrey Simpson. (Brigitte Bouvier/Brigitte Bouvier/For The Globe and Mail)

JEFFREY SIMPSON

Dear Mr. President: America’s fiscal health is on life-support Add to ...

To: President of the United States
From: Director of the Congressional Budget Office
Date: Nov. 7, 2012

First, let me extend my personal congratulations and that of the entire CBO staff on your election as president. The campaign, I know, was arduous. The purpose of my memo is to remind you of certain difficult decisions that will make governing just as arduous.

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Mr. President, the fiscal situation of our country is serious, even grave. It is not for me to say whether the full gravity of the situation was adequately explored during the campaign. But that’s over. Now, the hard part begins.

For the fiscal year that ended Sept. 30, the federal deficit stood at $1.1-trillion. That marked the fourth year in a row of deficits in excess of $1-trillion.

As a result, federal debt soared to 73 per cent of GDP, twice the ratio before the 2008 recession. The debt ratio now stands at its highest point since 1950, when we were still paying off the costs of the Second World War.

You are undoubtedly aware of what is being called “the cliff.” The cliff will present itself at the end of the year. At that point, the Budget Control Act of 2011 will become effective. The act was a fallback measure in case Congress and the administration could not agree on a mixture of spending restraint and tax increases.

That agreement was not forthcoming. Therefore, the act mandates large cuts in government spending, spread equally between defence and non-defence budgets, and the expiration of the across-the-board tax cuts in place for some years.

As part of our duty to inform Congress, the CBO estimates that, if these measures are implemented, the deficit will shrink by about $470-billion, the equivalent of 4 per cent of GDP. Unemployment will rise to 9 per cent in 2013, GDP will decline and, as we said in a report several months ago, these measures together will “probably be considered a recession.”

If, on the other hand, we avoid this “cliff,” and do not allow spending cuts or tax increases, the deficit will remain above $1-trillion, but unemployment will be 8 per cent instead of 9 per cent. The short-term shock to the economy will be attenuated, but the longer-term challenges will become more severe.

If the administration and Congress do nothing – if we stay on the current path – the CBO estimates the debt-to-GDP ratio will be 90 per cent by 2020. This would clearly be dangerous for the long-term health of our country.

As the CBO said in its last report – and, with respect, sir, I believe it worth repeating today, the first day after the election: “Policy-makers will need – at some point – to adopt policies that will require people to pay significantly more in taxes, accept substantially less in government benefits and services, or both.”

You know better than I do, Mr. President, whether the American people understood these realities during the campaign. Whether they now understand or not, there are unpleasant realities ahead. It is not for me, or the CBO, to offer advice as to which path to take. We can say, because it is our mandate to do so, that doing nothing, or tinkering, will leave the country with even graver long-term challenges to our economy. To be colloquial, there are no easy outs.

The CBO has also estimated that costs for Social Security and the elderly will roughly double between 2012 and 2022, unless measures are taken to suppress the yearly increases in these expenditures. As these programs, along with defence expenditures, are the largest items in the federal budget, I suggest that these must be addressed.

We at the CBO stand ready to carry out whatever modelling and analysis as might be necessary to help guide decisions in the weeks ahead before the “cliff,” and decisions after that will be required to restore our country to some kind of fiscal health.

I am aware that decisions about which course to adopt are for political leaders. The American people have made you their president for the next four years. I wish you the very best in confronting these extraordinarily difficult decisions.

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