Introducing CRFB's Latest Long Term Realistic Baseline
With the release of CBO's Long-Term Budget Outlook last week, CRFB has updated the Realistic Baseline to incorporate elements of CBO's long-term budget and economic projections. Our baseline's results are little changed from last year, once again showing that a reasonable projection of current policy puts us on a dangerous fiscal path.
Compared to CBO's projections of current law (the Extended Baseline) and current policy (the Alternative Fiscal Scenario), the CRFB Realistic Baseline adheres more closely to debt projections under CBO's AFS in the near-term but roughly splits the difference between CBO's AFS and Extended Baseline over the longer-term. Under the Realistic Baseline, debt as a percent of GDP rises from 73 percent in 2012 to 85 percent by 2022, 134 percent by 2037, and 428 percent by 2087. This is in contrast to current law, where debt falls throughout the projection window until it is paid off in 2070, and CBO's AFS where the debt rises even faster to more than 900 percent of GDP by 2087.
Source: CBO, CRFB
Spending as a percent of GDP rises significantly over the longer-term, mainly due to increasing interest payments on the debt and rising health care spending. Total federal spending under the CRFB Realistic Baseline falls from the 2012 level of 23.4 percent of GDP to 22.3 percent by 2018, but then rises to about 30 percent by 2037, 38.2 percent by 2060, and 50.4 percent by 2087. Revenue rises throughout the projection window but fails to keep up with spending, increasing from 15.8 percent of GDP in 2012 to 18.8 percent in 2022, 20.1 percent in 2037, and 25.1 percent in 2087.
As you could imagine, the Realistic Baseline's policy assumptions are closer to the Alternative Fiscal Scenario than the Extended Baseline, although there are some key differences that cause divergence over the long-term. The differences in assumptions are presented below.
In addition, we have calculated exactly what is responsible for the differences between current law and the Realistic Baseline. The 2001/2003 tax cuts, the patches to the Alternative Minimum Tax, the repeal of the sequester, the doc fix, and the partial repeal of the Affordable Care Act's cost controls comprise the differences, with the main sources of increased debt being in the first two policies.
Source: CBO, CRFB
Note: 2001/2003 tax cuts include interaction with AMT patch
The CRFB Realistic Baseline represents what we believe is a more realistic projection of where we're heading based on an extension of the path we're on today -- and that path is not promising. Of course, Congress could ultimately take a policy approach that results in even worse debt (like something more in line with CBO's current policy), but either way we won't be able to sustain ever-increasing debt levels for very long. We need to stick more closely to current law debt levels over the long term while avoiding the short term economic damage and poor policies that come with current law.