In light of the recent controversy over the findings from economists Carmen Reinhart and Ken Rogoff on the relationship between debt and growth, there has been much speculation about what the critiques of those findings mean for what we know about that correlation. Former Council of Economic Advisors chair Michael Boskin writes in Project Syndicate that the economic context of debt accumulation matters, but the longer-term risks of not paying attention to the debt are clear:

We should adopt policies that benefit the economy in the short run at reasonable long-run cost, and reject those that do not. That sounds simple, but it is a much higher hurdle than politicians in Europe and the US have set for themselves in recent years.

I estimated the impact on GDP of America’s recent and projected debt increase (in which the explosive growth of public spending on pensions and health care looms largest), using four alternative estimates of the effect of debt on growth: a smaller Reinhart/Rogoff estimate from a more recent paper; a widely used International Monetary Fund study, which finds a larger impact (and which deals with the potential reverse-causality problem); a related CBO study; and a simple production function with government debt crowding out tangible capital. The results were quite similar: unless entitlement costs are brought under control, the resulting rise in debt will cut US living standards by roughly 20% in a generation.

Corroborating statistical evidence shows that high deficits and debt increase long-run interest rates. The effect is greater when modest deficit and debt levels are exceeded and current-account deficits are large. The increased interest rates are likely to retard private investment, which lowers future growth in employment and wages.

Numerous studies show that government spending “multipliers,” even when large at the ZLB, shrink rapidly, then turn negative – and may even be negative during economic expansions and when households expect higher taxes beyond the ZLB period. Permanent tax cuts and those on marginal rates have proved more likely to increase growth than spending increases or temporary, infra-marginal tax rebates; successful fiscal consolidations have emphasized spending cuts over tax hikes by a ratio of five or six to one; and spending cuts have been less likely than tax increases to cause recessions in OECD countries.

It is true that the design and timing of a comprehensive deficit reduction plan will matter a great deal in its economic benefit. But that is why working toward an agreement is so important. Putting debt on a sustainable path will be difficult, and it will take both parties to achieve a deal that will be better in both the short and long run for the economy than the sequester. Boskin agrees that we can't put the budget on the back-burner:

Nonetheless, the evidence clearly suggests that high debt/GDP ratios eventually impede long-term growth; fiscal consolidation should be phased in gradually as economies recover; and the consolidation needs to be primarily on the spending side of the budget. Finally, the notion that we can wait 10-15 years to start dealing with deficits and debt, as economist Paul Krugman has suggested, is beyond irresponsible.

Click here to read to full op-ed.

Although efforts to replace the sequester have been on hold for a while, the House Democrats, led by House Budget Committee ranking member Chris Van Hollen (D-MD), have come out with a bill to replace the remaining 2013 and part of the 2014 sequester with $181 billion of savings over ten years. The bill is similar to one Rep. Van Hollen produced last year and one that Senate Democrats introduced this year.

The bill includes a roughly equal mix of tax increases and spending cuts, according to The Hill. The bill contains elements of both the House effort last year and the Senate effort this year. It includes the Buffett Rule ("Fair Share Tax") as its main revenue-raiser along with disallowing the domestic production deduction, expensing for intangible drilling costs, and the use of last-in first-out (LIFO) accounting for major oil companies.

As with last year's bill, the spending cuts include the elimination of direct commodity payments for farmers, a provision that has been included in the competing Congressional farm bills. It also reduces the defense spending caps in years 2017-2021, a similar provision to one included in the companion Senate sequester replacement bill.

Ideally, lawmakers would replace the sequester on a permanent basis with a comprehensive deficit reduction plan that makes much more gradual and smarter cuts and has savings in many different areas of the budget. However, the House Democrats' plan is positive in that it responsibly pays for a two-year repeal of the sequester.

 In order to avoid bumping up against the statutory debt ceiling, the Department of the Treasury has begun undertaking a number of so-called "extraordinary measures". The current debt limit is $16.394 trillion.

Keep checking back as we update this table (and click here for last year's Debt Ceiling Watch of 2012 and click here for the 2011 watch). 

Today, the Congressional Budget Office (CBO) released its analysis of President Obama’s FY 2014 budget request. CRFB has released a reaction to the score of the budget, praising the President for putting forward a deficit reduction offer that addresses the country's debt path, but warning that there would still need to be more done, particularly on entitlement spending.

As we wrote in our analysis on the OMB's estimates, the President’s budget does put debt on a downward path as a share of the economy, a key goal for fiscal responsibility. The CBO analyzed the whole budget and predicted that if his proposal were enacted, the debt would rise 75.2 percent of GDP to a peak of 77 percent of GDP in 2014 to before falling gradually to 69.8 percent by 2023. These debt levels are actually slightly lower than the White House’s initial projections from April due to the lower baseline projections for debt, as OMB's scored savings are close to CBO's estimates. 

^{Source: CRFB}

The President had proposed his budget in two parts, the savings from his final deficit reduction offer in the fiscal cliff negotiations comprising the first part and other priorities comprising the second part. CBO examines the budget as a whole and finds that compared to current law, the President's budget would reduce deficits by $1.1 trillion, or $1.6 trillion compared to CRFB's Realistic baseline.

^{Source: CBO, OMB}

Under the President's budget, spending would be 21.8 percent of GDP by 2023 while revenues would rise to 19.7 percent of GDP. As a result, deficits under the President's budget would fall from 4.2 percent of GDP in 2013 to 2.1 percent by 2023.

The budget is an encouraging effort to get serious about deficit reduction, but it also underscores how much work is left to be done. With the compromises of the past two years, Congress has made some solid progress, but more remains to be done. Our analysis of the CBO’s recent budget projections found that $2.2 trillion in additional savings are needed to put the debt on a clear downward path as a percentage of the economy.

Lawmakers should use the budget negotiations as an impetus to have an honest discussion about our nation’s fiscal future and come to compromise that will rein in debt over the long term and encourage future economic growth. As CRFB President Maya MacGuineas said in our reaction to the CBO analysis:

It is encouraging to see that the President’s proposals would indeed begin to reduce the debt – and to lower levels than originally thought. However, the debt would just barely be falling, meaning that any small change in projections could bump it back up. Regardless, additional reforms will be needed over the long-term, especially to slow the growth of health care programs and shore up Social Security.

Click here to read our release on the CBO analysis.

Although it may be difficult to get an updated comprehensive score of the Affordable Care Act from CBO, CBO has updated its estimate of the coverage provisions of the Affordable Care Act with each new baseline. This baseline is no exception.

The gross cost of the coverage expansions from Medicaid, the new health insurance exchange subsidies, and tax credits for small business coverage stands at $1.8 trillion over ten years. The net cost of the coverage provisions -- which includes the related mandate penalties, excise tax on high-cost health plans, and related effects on spending and (mostly) revenue -- stands at $1.36 trillion. Compared to the previous estimate in February 2013, the net cost of the coverage provisions is about $35 billion higher despite the gross cost of coverage expansion being $80 billion lower.

^{Source: CBO}

An accompanying CBO blog post details the reasons why these projections have changed since February. Medicaid outlays are up and exchange subsidies are down because CBO projects that more people will be in states that expand Medicaid, taking people with incomes between 100 and 133 percent of the poverty line out of the exchanges. The net effect reduces the cost of these two expansions by $70 billion. The cost of small business credits for offering insurance coverage is $10 billion lower due to businesses being slower than anticipated in using those credits.

The reduction in the gross cost of coverage, though, is exceeded by the reductions in the savings from related provisions. Individual mandate penalties are down due to recently proposed regulations that expand exemptions from the mandate. Employer mandate penalties are down due to an increased number of people projected to receive coverage through their employer. Relatedly, secondary budgetary effects -- which mainly reflect new revenue from people shifting their compensation from non-taxable health insurance to taxable income due to their health insurance plan not having as much value or their not receiving employer coverage -- also produce fewer savings because of the increase in employment-based health coverage. Finally, the revenue from the excise tax is down because of slower-than-anticipated premium growth, which results in fewer health plans being subject to the tax.

Earlier this week, CBO also responded to a request from House Budget Committee Chairman Paul Ryan CBO for an updated score of legislation to repeal the Affordable Care Act, which the House is expected to pass today. CBO said it was unable to do a cost estimate at the moment given the other things they are currently working on.  However, they explain the estimate would likely be similar to the one released last July, which found that repeal would increase the deficit by $109 billion from 2013-2022. They noted that the net cost of coverage provisions were $30 billion higher in the 2014-2022 period than they were estimated to be last July and said that the other parts of the legislation (net savings) had likely increased by a similar amount, thus keeping the overall budget impact at a similar magnitude.

Side-Stepping Sequestration – It was as predictable as the Washington Capitals blowing a playoff series lead. Lawmakers are looking to carve out exemptions to sequestration, including areas such as Head Start and medical research. The piecemeal approach to dealing with the sequester is not the way to go. Former Pennsylvania governor and Fix the Debt co-chair Ed Rendell, has a better idea -- replace sequestration with a comprehensive debt plan. Meanwhile, the Pentagon announced Tuesday it will furlough around 650,000 civilian employees for 11 days. It was able to reduce the number of furlough days by finding additional savings elsewhere in it budget.

Debt Ceiling Rising Back Up As Issue – The current suspension of the statutory debt ceiling will be lifted on May 18. Though it will no longer be suspended, it’s still up in the air as to when it will need to be increased. Additional revenue from economic growth and the fiscal cliff deal along with spending cuts and payments from Fannie Mae and Freddie Mac are slowing the growth of the debt. Coupled with the “extraordinary measures” Treasury can employ to put off the debt limit, it will be at least until Labor Day and possibly as late as November before policymakers have to seriously wrestle with increasing the debt limit. Last week, the House passed legislation prioritizing payments on the debt and Social Security of the debt limit is reached. The White House has promised to veto the bill, which isn’t expected to pass the Senate. House Republicans will meet Wednesday to discuss their strategy on the issue going forward. We argue that we cannot put off work towards a comprehensive fiscal plan until another debt limit crisis is right in front of us. Doing so would likely result in solutions that are suboptimal or are gimmicks that don’t adequately address the issue. Keep track of debt ceiling developments here.   

Support Grows for Budget Conference – The budget process could be the vehicle for negotiating a fiscal deal well ahead of the debt ceiling fight. Both the House and Senate have passed budgets for next year, but lawmakers have not taken the next step in forming a conference committee to work out the differences in the two budgets. But more Republicans in the Senate are joining Democrats in calling for a conference committee to get to work now.

Appropriations Process Gets Under Way – Under law Congress can begin considering spending bills even without a concurrent budget resolution on May 15 and lawmakers don’t seem to be wasting any time getting the process started. House Appropriations subcommittees will begin marking up spending bills Wednesday. Congress will likely need all the time it can get to agree on spending bills ahead of the new fiscal year beginning October 1 since the House and Senate begin far apart on the topline spending numbers. The House set the spending level at $967 billion, figuring that sequestration will remain in effect. The Senate assumes the sequester will be repealed, putting spending at $1.059 trillion.

CBO Sheds Light on Budget and Economic Situation – The Congressional Budget Office (CBO) on Tuesday updated its ten-year projections of the budget and economic outlook. It estimates that the federal budget deficit for fiscal year 2013 will be $642 billion and that deficits will fall in the near term, only to begin rising again by the end of the decade “because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.” As we note, our debt problems are far from solved and the improved short-term numbers are no excuse to stop working towards a comprehensive fiscal plan that addresses the long-term debt. On Friday, CBO will release its analysis on President Obama’s fiscal year 2014 budget request. Stay tuned for analysis from CRFB on both reports. 

Your Chance to Shape Tax Reform – Senate Finance Committee chair Max Baucus (D-MT) and House Ways and Means Committee chair Dave Camp (R-MI) continue their bicameral, bipartisan tax reform effort and they are now looking for public input. Last week, they launched a website at taxreform.gov that allows people to share their stories and ideas for reform. They also have a Twitter account @simplertaxes. Interested in corporate tax reform? Try out our simulator for ideas.

The Case for Chained CPI – Switching to a more accurate measure of inflation received support from two chairs of the White house Council of Economic Advisors. Martin Neil Baily, who served in the Clinton Administration and Glenn Hubbard, who served under George W. Bush wrote in an op-ed in The Hill, "As economists from opposite ends of the political spectrum, we would strongly urge the president and leaders in Congress to continue to support moving to chained CPI, which represents the most accurate available measure of inflation and cost-of-living increases. Switching to this more accurate measure of inflation represents the right technical, fiscal and retirement policy — and policymakers should not delay any further in making this improvement." CRFB’s Marc Goldwein and Ed Lorenzen made a similar case recently in an op-ed of their own. 

Farm Bill Moves In Senate – The Senate Agriculture Committee Tuesday approved a new farm bill that would reduce deficits by about $18 billion over ten years. The House is considering a version that would save more, but the primary difference is cuts in nutrition programs such as food stamps.

Immigration Reform and the Budget – Immigration reform has risen to the top of the congressional agenda. The Senate Judiciary Committee is in the process of marking up a bipartisan comprehensive overhaul of the immigration system. The increased focus has brought attention on how immigration reform would affect the budget. CBO says it will utilize some dynamic scoring to estimate the budgetary impact of reform because it will have such a broad effect on the labor market. Also, the chief actuary of the Social security Administration estimates that reform would improve Social Security’s finances because it would result in more workers contributing to the program.

Budget Reform Ideas Emerge – Once again problems in moving a budget through Congress underscore how broken the process has become. Likewise, ideas for fixing the process are reemerging, such as biennial budgeting. See more ideas here.

Key Upcoming Dates (all times are ET)

May 16

• Dept. of Labor's Bureau of Labor Statistics releases April 2013 Consumer Price Index data.

May 17

• The CBO releases its analysis of the President's FY 2014 budget.

May 19

• The debt limit is re-instated at an increased amount to account for debt issued between the signing of the suspension bill and this date. After re-instatement, the Treasury Department will be able to use "extraordinary measures" to put off the date the government hits the debt limit potentially for a few months.

May 21

• Hose Ways and Means subcommittee hearing on Medicare reform at 10 am.
• Senate Budget Committee hearing on the nomination of Brian Deese to be deputy director of the Office of Management and Budget at 10:30 am.

May 22

• Joint Economic Committee hearing on "The Economic Outlook" with Federal Reserve Chair Ben Bernanke at 10 am.

May 30

• Bureau of Economic Analysis releases second estimate of 2013 1st quarter GDP.

June 7

• Bureau of Labor Statistics releases May 2013 employment data.

June 15

• Deadline for estimated quarterly individual and corporate tax payments.

June 18

• Dept. of Labor's Bureau of Labor Statistics releases May 2013 Consumer Price Index data.

June 26

• Bureau of Economic Analysis releases third estimate of 2013 1st quarter GDP.

Update: This blog has been updated to include numbers from the CBO score of the House farm bill.

As we have written previously, the American Taxpayer Relief Act extended the provisions of the 2008 farm bill for one year, despite both chambers producing farm bills and the Senate passing its one.  Lawmakers have until January 1 to come to a compromise and avoid reverting to the 1949 permanent farm bill, which would have major negative implications for deficit reduction and agriculture policy.

In an effort to work toward a bipartisan agreement, leaders in both the House and Senate have committed to moving farm bills in the coming weeks. The Senate Agriculture, Nutrition, and Forestry Committee will mark up S. 10 tomorrow, and the House Agriculture Committee will take up its bill on Wednesday. The major difference between the two bills is how they deal with nutrition programs -- the House version would cut $21 billion from nutrition programs, compared with $4.1 billion in cuts in the Senate bill -- as well as the design of crop insurance programs and the replacement for direct commodity payments.

^{Source: CBO}

The Congressional Budget Office has revised its cost estimates of the Senate bill, finding that the legislation would reduce spending by $18 billion over the 2014-2023 period compared to curent law. An earlier estimate of the Senate bill this year showed the legislation would save $13 billion. CBO estimates the new House bill will save $33 billion over ten years relative to current law and $40 billion assuming that the sequester is repealed.

The CBO also included a savings estimate if Congress passed legislation repealing the sequester. Eliminating this portion of the sequester and subsequently enacting the Senate farm bill would produce $24.4 billion in savings under the revised baseline, increasing the bill's deficit reduction by one-third.

Leaders in both chambers seem hopeful about moving a farm bill under regular order well before the January 1 deadline, and the Agriculture Committees have produced serious draft legislation that could both reduce the deficit and modernize our outdated agriculture programs. We hope that they are aggressive in achieving savings, as agriculture reforms are an area of consensus in terms of deficit reduction.

With previously enacted deficit reduction and the economic recovery helping our short-term fiscal outlook, it may be tempting for lawmakers to put the budget on the back burner and turn to other issues. But this would be a clear mistake.

Fix the Debt co-chair and former Governer Ed Rendell (D-PA) writes in today's Politico that the current approach is doing unnessary harm, leaving our long-term fiscal problem still unsolved, and forfeiting the benefits that could come with a comprehensive approach.

It seems the debt deniers are back.

If recent news reports are any indication, there is a growing sentiment that after enacting the nearly across-the-board “sequestration” spending cuts, Washington has already done enough to reduce the deficit and should avoid further deficit reduction that could disrupt the fragile recovery.

However, this rhetoric is based on the false notion that deficit reduction and economic growth are mutually exclusive. While we definitely should avoid immediate austerity, starting by reversing the austerity now in effect via the sequester, we must replace these less-than-intelligent, across-the-board cuts with a long-term fiscal plan — one that protects the recovery and promotes economic growth.

The austerity we currently face is precisely the result of our inability to deal with long-term deficits. Instead of reforming our Tax Code and entitlement programs, we’ve slashed important investments in the worst possible way.

Lawmakers have made some progress on debt and deficits, but the savings they have acheived are largely from the low hanging fruit in the budget, with the tough choices still to be made. Comprehensive plans can both achieve the needed additional savings while making the budget more effective in achieving its goals, protecting vulnerable populations, and promoting economic growth.

Our current situation is the worst of both worlds. Excessive, mindless deficit reduction in the short term when it will harm the economy, and rapidly growing debt over the long term when that debt will start slowing down economic growth. What’s more, the recent political maneuvering in which Congress acted swiftly to eliminate the sequester’s furloughs of air traffic controllers — while efforts to cancel the sequester as a whole went nowhere — underscores the political reality that the mindless cuts may be here to stay. Unless Congress replaces the sequester with a comprehensive deficit-reduction plan, 4 million meals for seniors will be eliminated, 70,000 children will be kicked out of of Head Start, and 125,000 American families will be at immediate risk of losing rental assistance and, along with it, their homes. The only way to avoid allowing a few powerful interest groups to get their own carve-outs from the budget cuts while leaving everyone else in the cold is to come to an agreement on a responsible deficit-reduction plan to replace the sequester.

Fortunately, there is a better way forward. The recent deficit-reduction plan put forward by Erskine Bowles and Alan Simpson, for example, would replace immediate austerity with a comprehensive plan that is smarter, larger and more gradual. Such a plan would help restore this country’s economic credibility. The markets must be reassured that the government is willing to control its debt over the long term. Enacting a plan now allows us to gradually phase in changes , allowing Americans time to adjust. Moreover, gradual changes would help the economy avoid the kind disruptions that are sure to occur if our elected leaders wait until market forces leave them with no choice other than through dramatic, sudden policy changes.

Only by reducing our overly heavy debt burden can we be sure we’re putting our economy in an environment most conducive to sustained growth. Designed properly, a comprehensive deficit-reduction framework can promote short- and long-term economic growth. Such a deal would avoid the effects of the sequestration and reduce uncertainty; improve confidence in future economic growth; promote work, savings and investment over the long term; and reduce the likelihood of a debt-fueled fiscal crisis in the future. Only a comprehensive approach, one that reverses today’s austerity but enacts intelligent deficit reduction over time, will truly fix our debt.

Click here to read the full op-ed.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

Economists Carmen Reinhart and Kenneth Rogoff of Harvard University have issued an erratum to their 2010 paper, “Growth in a Time of Debt.” Their original paper found some evidence of a possible tipping point at which higher debt levels would significantly restrict economic growth, with median growth rates falling from 2.9 percent among countries with debt levels between 60 percent and 90 percent of GDP to 1.5 percent among countries with debt levels greater than 90 percent. However, a paper by Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts-Amherst raised three methodological concerns: an Excel coding error, possible exclusion of relevant data, and questions over the weighting methodology. R&R correct for errors and other concerns, resulting in a median growth rate of 2.5 percent of GDP for high debt countries, compared to the original findings of a -0.1 percent mean growth rate and a 1.6 percent median growth rate, and 2.2 percent mean growth rate in the HAP analysis.

R&R have made several changes to their 2010 paper after re-examining the data. First, they correct the Excel coding error, which includes the missing countries of Australia, Austria, Belgium, Canada, and Denmark in the study for all debt levels, though the most notable change is to increase the median economic growth rate for 90 percent countries by +0.3%. In addition to this coding change, they also found several blank cells containing non-zero entries that were affecting the results by a magnitude of 0.1%-0.2% in either direction.

R&R also make two other revisions based on data that has since been acquired. First is the addition of Spain from 1959 – 1980, a low debt nation with high growth during that time which would not affect the 90 percent threshold. The other is a revision of the New Zealand data. Two years (1948 and 1949) are added (a coding correction), and the data for GDP growth rate was changed to reflect a better source. Official GDP data does not exist for New Zealand prior to 1955, so the authors used data from the work of Angus Maddison in the original paper. However, GDP data from the The New Zealand Historical Statistics seems to better fit the economic history of the country, so R&R replace the Maddison data with the other series. 

^{Source: Reinhart and Rogoff}

While the differential in growth rates after 90 percent threshold becomes weaker after the R&R erratum, there is still a negative correlation between debt and growth. After adjustments, R&R’s more recent paper, using a their full data set instead of just post WWII data, found median growth rates of 2.3 percent among high debt countries compared to 2.6 percent for countries between 60 percent and 90 percent. Beyond R&R, many other studies using more sophisticated econometric techniques stand as evidence of a negative relationship between high debt and economic growth.

International comparisons are always problematic as each country and time period have unique circumstances, and it is difficult to isolate two dynamic variables such as economic growth and debt. But projections of the U.S. fiscal outlook appear to be unsustainable. It would be irresponsibly to wait for a crisis to resolve this problem and run the risk of serious economic slowdown, especially with the many benefits of deficit reduction done in a smart, thoughtful way.