The CBO released their Long-Term Budget Outlook for 2010! This may be a weird thing to get excited about, but I was looking through their 2009 outlook and wishing that I could work with an updated version.
“Keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO’s projections, or some combination of those approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them.”
In order to make sense of the above chart, the difference between the extended-baseline scenario and the alternative fiscal scenario needs to be understood. The extended base-line scenario assumes that taxes and revenue change as is expected in the current law. The alternative fiscal scenario assumes things that are likely but are not scheduled under the current law, such as no Medicare physician payment cuts and the AMT tax relief (See Table 1-1 in the report for more details).
My main complaint about this approach is that the least likely aspect of alternative fiscal scenario is also one of the most important: that it assumes that the tax cuts from 2001 and 2003 are not going to be allowed to sunset. This can be partially corrected for by using the revenue from the extended baseline-scenario and spending from the alternative fiscal scenario. We find that the primary deficit (Deficit before including interest payments) will be -1.4% in 2020 and -3.1% of GDP in 2035. Incorporating in the interest payments from the alternative baseline scenario (The actual interest payments will be higher due to a larger debt build up), that means that the total deficit will be -4.5% in 2020 and -7% in 2035.
I’ll end with a CBO table that informs us that the sooner the deficit is brought under control, the better: