CBO Warns of Potential Economic Downturn

In an “Update to the Budget and Economic Outlook,” released August 22, the Congressional Budget Office (CBO) warns that Congressional failure to address a number of expiring tax provisions, reductions in Medicare physician payments, sequestration, extension of emergency unemployment benefits, and the Social Security payroll tax could send the economy into a downturn next year.

According to the CBO report, while the deficit would shrink to an estimated $641 billion in fiscal year 2013 (or 4 percent of GDP), such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession. The CBO estimates real GDP would decline by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate would rise to about 9 percent in the second half of calendar year 2013.

Currently, little information exists about how the sequestration will impact the federal budget program by program. In August, President Obama signed legislation that requires the White House Office of Management and Budget (OMB) to provide specifics on how the Administration would implement the across-the-board spending cuts scheduled for early January. That report is due September 6. To date, OMB has not provided any details on the cuts scheduled for FY13, taking the position that the cuts would be so excessive that Congress should act to halt the planned sequester.

The Pell Grant, among a few programs with special treatment, remains protected from sequester cuts during FY13. By and large, however, all other federal student aid programs would be cut an estimated 8.5 percent.

Senator Tom Harkin (D-IA), chair of the Senate Appropriations Subcommittee that funds both NIH and the Department of Education, held a July hearing to examine the impact of the sequester on education programs. In conjunction with the hearing, he released “Under Threat: Sequestration’s Impact on Nondefense Jobs and Services.” The report indicates that that the National Institutes of Health (NIH) would be cut by $2.4 billion under sequestration.

As previously reported by NACUBO, a number of higher education-related tax provisions have already expired or will expire at the end of the calendar year. On August 2, the Senate Finance Committee approved the extension of some expired and expiring tax breaks; the legislative package, however, did not include extension of Section 127 or the American Opportunity Tax Credit (AOTC).

The AOTC significantly enhances and broadens the Hope Scholarship Credit by:

• Increasing the credit from $1,800 to $2,500.
• Expanding eligible expenses.
• Making the credit available for four rather than only two years.
• Increasing the income phase-out thresholds.
• Making the credit partially refundable.

Section 127 allows an employer to offer an employee up to $5,250 per year in tax-free educational assistance for undergraduate or graduate-level courses. This benefit, which covers tuition, fees, books, supplies, and equipment, has been an important means of building and expanding workforce competencies.

As Congress continues to grapple with the federal budget deficit, NACUBO is telling legislators that planned across-the-board cuts and other policy changes could further undercut our nation’s efforts to help keep a college education within reach for students, our country’s future workforce.