What Else is New? Changes in CBO's Baseline
Naturally, when a new budget projection is released, as CBO's updated baseline was yesterday, a good question to ask is: what happened? It is interesting to see how the budget projections change as time unfolds and CBO incorporates new data. As is often the case, the answer boils down to mostly economic and technical revisions to health care, interest spending, and revenue.
Legislative changes played very little role, as the highway bill and student loan extension had minor impacts on the budget. A change that could be labeled a "judicial change" was the Supreme Court's decision on the Affordable Care Act. According to CBO, that decision, which allowed states to opt out of the Act's Medicaid expansion without losing other Medicaid funding, reduced Medicaid spending by $288 billion over ten years and increased exchange subsidies by $210 billion for net deficit reduction of $78 billion.
However, health spending has changed in many other ways besides the Supreme Court decision. Medicaid spending otherwise was revised downward by $10 billion due to the net effects of higher medical prices and lower current spending than predicted. Medicare spending was revised down by $33 billion, the net effect of higher projected provider payments and the incorporation of recent slower spending growth into the projections.
Net interest spending was revised down by $240 billion as a result of lower projected interest rates in the near term. For example, CBO projects that three-month Treasury bills will have yields that are about a percentage point lower in 2015 and 2016 than they expected in January. For ten-year bonds, yields are between 0.4 and 0.7 percentage point lower in each year between 2012 and 2016 than they expected in January. One other factor related to interest rates is student loans, which have been revised down by about $30 billion as lower interest rates have led to lower present value subsidy costs for those loans.
|Changes in CBO's Baseline from March (billions)|
|2013-2022 Savings/Costs (-)|
|CBO March Deficit||-$2,887|
|Supreme Court Ruling||$78|
|Other Medicaid Changes||$10|
|Social Security Changes||-$41|
|Student Loan Changes||$29|
|Interest on Changes||$90|
|CBO August Deficit||-$2,258|
Note: Numbers may not add up due to rounding
Revenue over ten years was revised up by $170 billion, although it was actually revised downward by $108 billion over the first five years. The upward revision is due to increased projections of wages, salaries, and corporate profits as a percent of GDP, resulting in a larger tax base, and increased projected remittances from the Federal Reserve as a result of more asset purchases.
The only other major change is in Social Security, which had its spending revised upward by $40 billion. This is due to the net effects of higher projected benefits and cost-of-living adjustments and lower expected enrollees.
Overall, the total effect of these changes has reduced the ten-year deficit by $630 billion compared to March's estimate. Current law puts our debt on a sustainable path, current policy avoids a recession, but only a smart and gradual fiscal plan does both.