What's Changed Since August?

In CBO’s latest Budget and Economic Outlook, much has changed since their August baseline. As we explain in our report on the February baseline, the majority of change results from the American Taxpayer Relief Act (ATRA). However, there are several other legislative, technical, and economic revisions that for the most part cancel each other out but are still worth highlighting.

Legislative Changes

Legislative changes, predominately the ATRA, increased the cumulative deficit by an estimated $4.7 trillion. We’ve explained ATRA’s impact on the deficit in detail before, but the impact on revenues was by far the largest, reducing them by nearly $4 trillion through 2022. Also included in the $4.7 trillion is an additional $41 billion in emergency spending in 2013 recently appropriated in the aftermath of Hurricane Sandy as well as a reduction in funding allocated for overseas contingency operations (the budgetary term for spending in Iraq and Afghanistan.)

Economic Changes

Updated economic projections increased deficits by $141 billion. Even with improved economic growth in the short-term due to avoiding part of the fiscal cliff, higher debt levels over the next ten years will produce higher interest rates and therefore increase net interest payments by $192 billion more than projected in August. Another reason for increase in projected deficits is that CBO has revised spending on student loans (which had been revised down in August) upwards by $35 billion. Additionally, because of the recent 1.7 percent increase in cost of living adjustments, which was greater than anticipated, Social Security payments are projected to increase by $19 billion through 2022.

Technical Changes

On the other hand, technical changes resulted in a net decrease of $270 billion through 2022. An important factor here is health care spending. Medicaid spending is $236 billion less due to lower anticipated enrollment and per capital costs. Since August, CBO has improved its measurements of enrollment and now projects fewer people to enroll in Medicaid. A greater share of children and healthier adults are also expected to qualify, leading to 6 percent lower per capita costs.

Medicare projections are now $137 billion less than they were in August due to updated spending data that reflects lower than expected health care cost growth. CBO notes that since 2010, revisions to their earlier estimates have lowered Medicare spending by $200 billion in 2020. However, as we’ve argued before, it is unclear how long this lower growth trend will continue to last.

Another technical update is an increase of $44 billion in estimated revenue related to the Treasury’s transactions with Fannie Mae and Freddie Mac. Revenue over ten years was also revised up by $90 billion.  This reflects an increase of $138 billion over the first five years, but a decrease of $42 billion thereafter through 2022. In the first five years, CBO projects increased wages, salaries, and corporate profits due to strong near-term growth, but lower wages and salaries will decrease revenue slightly in the second half of the decade.

Changes in CBO's Baseline from August to February
  2013-2022 Savings/Costs (-)
CBO August Deficit -$2,258
Revenue Changes -$3,639
Spending Changes -$354
Interest -$704
Legislative Changes -$4,696
Revenue Changes $90
Student Loan Changes -$35
Social Security Changes -$19
Other Spending Changes $16
Interest on Those Changes -$7
Interest Rate and Inflation Changes -$186
Economic Changes -$141
Revenue Changes -$29
Medicare and Medicaid Changes $373
Veterans' Compensation Changes -$108
Fannie/Freddie Changes $44
Other Spending Changes -$34
Interest on Those Changes $92
Other Interest Changes -$137
Technical Changes $269
CBO February Deficit -$6,825

Source: CBO

Overall, the total effect of these changes, particularly from ATRA, has brought current law estimates much closer to current policy estimates. Compared to August’s baseline, CBO’s February report shows current law no longer puts our debt on a downward path and brings these projections closer in line to a more realistic, current policy scenario. That means policymakers will have more work to do on the debt.