CBO released its new budget and economic outlook, showing slightly higher ten-year deficit and debt projections from 2012-2021 than the last ten-year projections CBO produced this past August. The deficit will shrink from $1.3 trillion last year to $1.1 trillion in 2012, while deficits from 2013-2022 will be $3.1 trillion. CBO is projecting that debt as a percentage of GDP will rise from 73 percent this year to 75 percent in 2013 before falling to 62 percent in 2022.
Although deficits from 2013-2022 are projected to be lower than the 2012-2021 projections last August, over the comparable period, deficits in the January baseline will be $3.8 trillion. Changes in their economic assumptions mostly drive the slight deterioration from August to January. Shifting the budget window forward (dropping the relatively high 2012 deficit and adding the relatively low 2022 deficit) mostly accounts for 2013-2022 deficits being lower than the 2012-2021 deficits projected in August.
Outlays will fall from 24.1 percent of GDP in 2011 to 23.2 percent in 2012, and they will remain in the 21-22 percent range for the rest of the ten-year window. The trend towards the latter part of the projections ticks up, presumably due to the demographic shift that will result in rapidly growing Medicare and Social Security outlays. As for revenue, it is expected to rise from 15.4 percent of GDP in 2011 to 16.3 percent in 2012 and will reach 21 percent by 2022. Of course, revenue would come in much lower than this if the 2001/2003/2010 tax cuts and AMT patches are extended.
CBO's economic assumptions are worse than in August, forecasting that unemployment will actually rise from an average of 8.8 percent this year to 9.1 percent next year. Also, real GDP growth will fall from a relatively weak 2.2 percent to an even worse 1.0 percent next year. CBO attributes the economic deterioration in 2013 to the immediate tightening of fiscal policy scheduled that now includes the sequester, along with the expiration of the 2001/2003/2010 tax cuts.
However, this "tightening" is the product of a current law baseline, which involves making a variety of policy assumptions that are generally considered to be unrealistic. Because a number of policies are expected to be extended, but are written in law to expire, the current law baseline deficit is trillions less than what a more realistic path would show. Assuming that all the tax cuts are extended, the doc fix is extended, the sequester is turned off, and that troop levels spending will decrease, CRFB is projecting that debt could rise to over 86 percent of GDP in 2022.
The baseline shows that if we can stick to those debt levels, we will be in a lot better fiscal shape. But, as CRFB president Maya MacGuineas said this morning in our press release:
These budget projections show that getting the debt under control is not impossible, but they also represent a path that is both unlikely to occur and far from the best way to govern...While we are highly supportive of actions to reduce the debt, there are smart ways and there are mindless ways to proceed. Let's hope Congress acts to pass a well-thought-out debt deal rather than letting some automatic and blunt changes do their work for them.
Stay tuned for more analysis in the coming days on the CBO outlook.