Committee for a Responsible Federal Budget

Drawing a Realistic Baseline

Feb 24, 2014

CBO's recent budget projections show a much deteriorated budget outlook, with debt now rising faster over the coming decade than previously anticipated. Their projections, of course, are based a number of assumptions, including assumptions about future policy. Were Congress to make different policy choices than CBO assumes, debt numbers could change significantly.

Typically, CRFB makes certain adjustments to CBO's current law baseline to establish the CRFB Realistic Baseline, but this year the CBO baseline may represent a reasonable approximation of that. Differences between "current law" and "current policy" have been narrowed dramatically as a result of the 2012/2013 fiscal cliff deal - which extended $4 trillion of expiring tax cuts - and the 2013 Ryan-Murray deal, which created a glide path to the sequester-level spending caps.

With these changes in place, our view is that the CBO baseline represents a reasonable approximation of where the debt is currently headed (reasonable, but by no means definitive). After all, the CBO baseline assumes lawmakers continue to spend at current law levels on the wars abroad, allow doctors in Medicare to take an 25 percent payment cut, let a host of expired or expiring tax provisions disappear, and provide no additional sequester relief. 

For that reason, CRFB has contructed two alternatives to the CBO baseline. On the low end (the PAYGO Scenario), we assume that Congress fully abides by PAYGO rules (by fully offsetting any spending or tax cuts) while we draw down troop levels in Afghanistan from 38,000 to 30,000 by 2017, and that spending will decrease consistent with that plan.

On the high end (the No-Offset Scenario), we continue to assume the troop drawdown but also assume that lawmakers enact annual doc fixes, extend the refundable tax credit expansions after 2017, reinstate and continue the currently-expired "normal tax extenders," and repeal future sequestration cuts. Essentially, this is the scenario if lawmakers do not adhere to PAYGO at all. In both scenarios, we correct for some minor timing issues.

Bridge from Current Law to Alternate Scenarios (Billions of dollars)

Source: CBO, CRFB calculations
All numbers are rounded to the nearest $5 billion.

Not surprisingly, deficits and debt differ substantially depending on the assumptions made. Under CBO's baseline, debt will remain at about 72 percent of GDP through 2017, and then rise to 79 percent of GDP by 2024. After accounting for the war drawdown in our PAYGO Scenario, debt levels grow modestly slower -- reaching 77 percent of GDP by 2024 as opposed to 79 percent.

On the other hand, if policymakers choose the fiscally irresponsible route assumed in our No-Offset Scenario, debt would rise to 84 percent of GDP by 2024, and would be on a much faster upward path. 

The graph above illustrate that without real policy changes, debt will remain at its record high levels and begin to grow rapidly later in the decade. Yet, taking steps backward by failing to abide by pay-as-you-go rules will substantially worsen the fiscal situation.

In addition to the debt implications, the scenarios we laid out also have different implications for spending and revenues. The table below shows how other budget metrics fare under each scenario.

Budget Metrics (Percent of GDP)

Source: CBO, CRFB calculations

Clearly, the federal budget continues to be on an unsustainable path. Lawmakers should work on a bipartisan basis to take advantage of the upcoming Congressional and President's budget proposals to put forward responsible fiscal policies that reduce the debt as a share of the economy this decade and over the long term. At the very minimum, they should not be passing measures that make the situation worse, and should abide by PAYGO rules.

Click here or on either table for an Excel version of the tables.