CRFB Releases Its Realistic Baselines
Today, CRFB released a new policy paper showing a more probable fiscal outlook over the coming decade than what baseline budget projections would predict. Late last week, CBO released its updated current law budget and economic assumptions. While current law projections show debt continuing to grow over the next ten years, it is highly likely that actual deficits and debt will be much worse over both the medium- and long-term.
Under current law, debt is projected to grow from 62 percent of GDP this year to 69 percent by 2020. However, this current law baseline assumes that a number of policies that are scheduled to expire actually actually do, when in all likelihood many of them will be extended. There are four main assumptions in current law projections that are unlikely to materialize and will push deficits and debt even higher:
- The 2001/2003 tax cuts will fully expire at the end of this year;
- Lawmakers will stop "patching" the Alternative Minimum Tax (AMT) to keep it from hitting middle-income earners;
- Medicare physician payments will fall by about 30 percent over the next few years;
- Discretionary spending will grow in line with inflation over the next ten year, declining as a share of GDP.
Incorporating these changes (and a few other small ones) on top of baseline deficits will drastically increase out borrowing needs over the medium- and long-term.
|Current Law Deficits
|Extend 2001/2003 Tax Cuts for All but Top Earners
|Index AMT to Inflation
|Interaction Between Tax Cuts and AMT
|Medicare Pay Patch
|Faster Discretionary Growth
|Reduce Troops in Iraq and Afghanistan
|CRFB Realistic Baseline Deficits
Under CRFB's Realistic Baseline, debt would reach 89 percent of GDP in 2020 - much higher than the 69 percent projected under current law.
CRFB also developed a more realistic long-term baseline (click here to read about all of our long-term assumptions). Instead of debt rising to 85 percent of GDP by 2040, to 94 percent by 2060, and to 114 percent by 2080 (note: long-term baseline figures adjusted by CRFB to include CBO's updated medium-term projections from last week), debt would rise to 127 percent of GDP by 2030, to 182 percent by 2040, and to 246 percent by 2050 under more realistic assumptions. Surely, no economy could ever sustain such enormous debt levels.
In the policy paper, CRFB argues that policymakers should decide which policies are most important to continue, and then they should offset the costs of whichever policies they keep.