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CBO Reports Project Magnitude of Tax Increases and Sequestration on U.S. Economy, Propose IME Cuts for Deficit Reduction

November 16, 2012—The Congressional Budget Office (CBO) Nov. 9 released two reports, Economic Effects of Policies Contributing to Fiscal Tightening in 2013 and Choices for Deficit Reduction. Included as one of the options for deficit reduction proposed by CBO, Medicare direct and indirect graduate medical education (DGME and IME) would be cut by $10 billion in 2020 or $69.4 billion over 10 years.

The first report lays out the fiscal effects that tax increases and automatic spending cuts under sequestration would have on the nation’s economy should they be enacted as scheduled at the beginning of 2013. CBO projects “if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013…reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year.”  The report also estimates that the “contraction of the economy will cause…the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013.” However, “economic growth will pick up, and the labor market will strengthen, returning output to its potential level and shrinking the unemployment rate to 5.5 percent by 2018.”

CBO warns, “even if all of the fiscal tightening was eliminated, the economy would remain below its potential and the unemployment rate would remain higher than usual for some time. Moreover, if the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely…. annual deficits would average nearly 5 percent of GDP over the next decade, and debt held by the public would increase to 90 percent of GDP 10 years from now and keep rising rapidly thereafter.”

The second report updates a March 2011CBO report  and “reviews the magnitude and causes of the federal government’s budgetary imbalance, various options for bringing spending and taxes into closer alignment, and criteria that lawmakers and the public might use to evaluate different approaches to deficit reduction.”

The updated report lists potential cuts or policy changes that could be used to reduce the nation’s debt and decrease deficit spending, and “for simplicity, focuses on potential deficit reduction in one year: 2020.” The options include several changes to mandatory and discretionary health spending programs.

Among those of interest to academic medicine include a redesign and consolidation of federal government support for graduate medical education that results in a $10 billion cut to DGME and IME in year 2020, and reduced funding for the National Institutes of Health, generating $4 billion of savings in 2020. Both proposals were included in CBO’s 2011 report [see Washington Highlights, March 18, 2011], which projected savings over a 10 year window. 

With regard to the cost of entitlements, CBO suggests if lawmakers want to “put the federal budget on a path that is more likely to be sustainable than the one that would occur under current policies, they will have to change those policies in at least one of the following ways: make major reductions in the benefits that people receive when they get older, relative to the benefits envisioned in current policies; substantially decrease the other activities of the federal government, relative to the size of the economy, beyond the reductions that are already projected to occur; or raise revenues significantly above their historical average as a percentage of GDP.”


Dave Moore
Senior Director, Government Relations
Telephone: 202-828-0559

Len Marquez
Director, Government Relations
Telephone: 202-862-6281


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Washington Highlights, a weekly electronic newsletter, features brief updates on the latest legislative and regulatory activities affecting medical schools and teaching hospitals.

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Jason Kleinman
Sr. Legislative Analyst, Govt. Relations
Telephone: 202-903-0806