Understanding the Long Term Budget Projections

As if we didn't have enough on CBO's Long Term Outlook last week, we have more long-term budget projections, this time in the form of CRFB's Realistic Baseline!

Our projections use slightly different assumptions than both the Extended Baseline and the Alternative Fiscal Scenario (AFS). The resulting fiscal path just about splits the difference between the two baselines, which amounts to a wholly unsustainable fiscal outlook (if slightly less dire than the AFS). Under the CRFB Realistic Baseline, debt reaches 88 percent of GDP by 2020, 140 percent by 2035, and 437 percent by 2080. You can read more on the assumptions we made and the numbers that come out of it here.

But understanding why our baseline differs from CBO's other two scenarios requires understanding the difference between their current law scenario ("Extended Baseline") and their current policy scenario ("Alternative Fiscal Scenario"). Under the former, debt never exceeds 90 percent of GDP (and would fall to about 60 percent by 2050 if the wars were drawn down) while in the latter it exceeds 200 percent by 2037. The differences that lead to these disparate outcomes include:

  • Doc Fixes: Under current law, Medicare physician payments are scheduled to be cut by 30% as part of something called the Sustainable Growth Rate. The AFS (and CRFB's Realistic Baseline) assumes politicians freeze physician payments instead.
  • AMT Patches: The Alternative Minimum Tax is a secondary tax meant to capture high earners with low tax burdens. However, for a number of reasons, it now technically impacts middle-income families and so politicians pass annual "patches" to avoid this from occurring. Under current law, patches will stop while under the AFS (and CRFB's Realistic Baseline) they continue.
  • Tax Cuts: Under current law, the 2001/2003/2010 tax cuts expire at the end of 2012, as do a number of temporary "extenders". The AFS assumes that policymakers make both permanent (while CRFB's Realistic Baseline only assumes the 2001/2003/2010 tax cuts continue).
  • PPACA Cost Controls: The health reform law included a number of cost controls for Medicare and the exchange subsidies which are now part of current law but may prove unsustainable over the long-run. The AFS assumes that they are effective through 2021 but are overridden thereafter (CRFB's Realistic Baseline assumes they are partially overridden).
  • Discretionary Spending Growth: By budget convention, the current law baseline assumes discretionary spending grows with inflation through 2021 (as does CRFB's Realistic Baseline). The Alternative Fiscal Scenario instead assumes it grows with GDP.
  • Revenue Freeze: Were all the tax cuts (and AMT patches) to be renewed, revenue would still grow as a share of GDP due mainly to something called "real bracket creep" -- as well as due to the effect of the health care excise tax. However, the Alternative Fiscal Scenario holds revenue constant at 18.4 percent of GDP after 2021, essentially assuming that policy makers will enact future additional tax cuts.
  • War Drawdown: By  convention, CBO's current law baseline assumes all discretionary spending -- including for the wars -- will grow with inflation. However, the Alternative Fiscal Scenario (as well as CRFB's Realistic Baseline) assumes that troops will gradually be drawn down.

Here is a graphical bridge between the two scenarios (with the war drawdown added to current law).


Note: Interaction between the tax cuts and the AMT has been distributed among the two categories proportionally.

Not surprisingly, the tax cut extension contributes a significant chunk of debt to the AFS, although over the 75-year window, the assumption that revenue is frozen as a share of GDP plays a bigger role. AMT patches, discretionary spending growth, and the success of health reform's cost controls all play a big role as well.

The AFS and our Realistic Baseline paint a very bleak fiscal picture. However, as we pointed out earlier in the week, if lawmakers simply pay for any policy that diverges from current law, we will find ourselves in a much better situation.