February 2012

CRFB Kicks Off National Debt Tour Today at Harvard

Update: Watch the live stream below.

Today in Boston, CRFB kicks off a national tour of policymakers, fiscal experts, and business leaders as part of the national “Go Big” campaign pushing for a major deficit reduction deal in 2012.

The first event is being held at the Institute of Politics at Harvard University and will feature U.S. Senator Mark Warner (D-VA), an organizer of the Senate’s 2011 bipartisan “Gang of Six” deficit reduction initiative; Dave Cote, former member, National Commission on Fiscal Responsibility and Reform, and Chairman and CEO, Honeywell International; former Rep. Vin Weber (R-MN); and CRFB President Maya MacGuineas.

The event, moderated by Nina Easton, Washington Bureau Chief of Fortune, will be a frank discussion of the U.S. budget situation and the political and policy solutions that will be required for the country to overcome the enormous fiscal challenge it faces.

The tour will offer Americans across the country an opportunity to learn more about the threat posed by the national debt and how to address it. As CRFB’s Maya MacGuineas said:

Poll after poll shows that the national debt is a top concern for Americans. When it comes to addressing deficits and debt in way that strengthens the economy, people are looking for leadership and solutions from Washington, but all they see is partisanship and sound bites. Boston is the first stop in a cross-country tour to bring people together to confront this major challenge to our future. The National Debt Tour will inform Americans about what’s at stake, engage them in discussing solutions, and empower them to demand action from their leaders.

The event is open to the public. The event is available to be watched at Harvard's website here.

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Line Items: Presidential Edition

Happy Presidents Day – As we honor those who have led this country, the race to become the next in that line is becoming more heated. And federal budget and fiscal issues are at the heart of the campaign. Voters consistently rank deficits/debt as the second most important issue, and it is closely tied to the top issue – economy/jobs. The decisions made now towards aiding the recovery could have a significant effect on the long-term budget outlook, and fiscal decisions will impact the economy. Yet, election-year pressures threaten to delay much congressional action until the end of the year at the earliest. Will current policymakers be able to summon the courage of leaders that we honor today like Washington and Lincoln and act now in a substantive way?

Assessing the True Costs of the Presidential Campaign – This Thursday, February 23, CRFB’s US Budget Watch project will unveil its assessment of the budgetary impact of the campaign promises of the Republican presidential candidates at an event in Washington, DC. There has been a lot of talk about how much candidates for the White House are spending on their campaigns. However, there has been little discussion regarding the price tag taxpayers will face when one of the contenders takes office next year. On Thursday, that will change. This will be the first objective analysis of how candidates’ proposals will affect the national debt. President Obama will be included in a forthcoming round. The big event will also include a discussion of how this election can promote a constructive debate on the fiscal challenges facing the country and how to overcome them. US Budget Watch offered a framework for this discussion in 12 Principles of Fiscal Responsibility for the 2012 Campaign.

“Go Big” Goes on the Road – The movement pushing for a "Go Big" comprehensive deficit reduction plan this year goes nation-wide this week with The National Debt Tour. The first stop will be Tuesday in Boston at the Institute of Politics at Harvard University. Sen. Mark Warner (D-VA); former Rep. Vin Weber (R-MN); Honeywell International Chairman and CEO Dave Cote; and CRFB’s Maya MacGuineas will be among those participating and Nina Easton of Fortune magazine will moderate.

President’s Budget Released – The White House released its FY 2013 budget request last week. Derided by some as purely a campaign document, it calls for nearly $1.6 trillion in net new revenue, over $360 billion in health savings, and about $270 billion in other mandatory savings through 2022, along with $350 billion of jobs measures. In an initial statement, CRFB lauded the President for presenting specific policies to replace the mindless cuts of the sequester and for seeking to stabilize the debt as a share of the economy, but warned that the budget does not go far enough. The debt would be stabilized at 76 percent of GDP in 2022 but then rise again outside the ten year window due to the costs of an aging society. CRFB recommends stabilizing the debt at 60 percent of GDP and putting it on a path to decrease further. We also criticized the use of “war savings” to pay for some infrastructure spending, which we consider a budget gimmick. We further analyzed the budget in a paper and through a blog series.

Payrolling Off a Cliff – Facing a deadline at the end of the month to extend the 2 percent payroll tax cut, doc fix and expanded unemployment benefits, Congress last week reached an agreement that leaves the cost of the extension of the payroll tax holiday for the rest of the year unpaid for. CRFB sees this as fiscally irresponsible, as we pointed out in a statement and also here. As we said, “We cannot afford any more holidays from fiscal responsibility.”

Key Upcoming Dates (all times ET)

February 21

  • National Debt Tour kicks-off in Boston at 6 pm.

February 22

  • Arizona GOP debate sponsored by CNN at 8 pm.

February 23

  • CRFB's US Budget Watch project releases an assessment of the budgetary impact of the campaign proposals of the GOP presidential candidates at 9:30 am.

February 28

  • GOP presidential contests in Arizona and Michigan.

February 29

  • US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2011 fourth quarter GDP.

March 3

  • Washington Caucus

March 6

  • Super Tuesday - presidential contests in Alaska, Georgia, Idaho, Massachusetts, North Dakota, Ohio, Oklahoma, Tennessee, Vermont and Virginia.

March 6-10

  • Wyoming Caucus

March 9

  • Dept. of Labor's Bureau of Labor Statistics releases February 2012 employment data.

March 10

  • Presidential contests in Kansas and the Virgin Islands

March 13

  • Presidential contests in Alabama, Mississippi, and Hawaii

March 16

  • Dept. of Labor's Bureau of Labor Statistics releases February 2012 Consumer Price Index (CPI) data.

March 17

  • Missouri Caucus

March 18

  • Puerto Rico primary

March 19

  • Oregon GOP Debate sponsored by PBS at 9 pm.

March 20

  • Illinois primary

March 24

  • Louisiana primary

March 29

  • US Dept. of Commerce's Bureau of Economic Analysis releases its third and final estimate of 2011 fourth quarter GDP.

Going Long: OMB's 75-Year Projections

In our paper on the President's budget, we noted that the budget would only temporarily stabilize the debt as a percent of GDP. In fact, it would rise from roughly 77 percent in 2022 to 93 percent in 2035 and about 125 percent in 2050. Where did those numbers come from? There's a section in the President's budget called "Supplemental Materials" that contains a spreadsheet detailing the 75-year outlook for debt, deficits, spending, and revenue, along with numbers for alternative scenarios based on different economic and budget assumptions.

In the base scenario, debt rises steadily from the 2020s on, reaching about 190 percent of GDP by 2085. It would certainly be a nightmare to have debt that high, though it would be a large improvement over the CRFB Realistic baseline, which has debt at 477 percent of GDP in the same year. 



Revenue gradually rises from its 2022 level of 20 percent of GDP to about 21 percent by the 2080s. This increase is actually smaller than the CRFB Realistic baseline, because OMB does not assume that revenue rises as a percent of GDP as real incomes rise. This assumption of essentially frozen revenue as a percent of GDP is similar to CBO's long-term Alternative Fiscal Scenario, but different from CRFB Realistic, which allows rising incomes to push up revenue. Revenue only rises as a share of GDP in OMB's projection due to the growing reach of the excise tax on high-cost health insurance plans.

Spending rises much faster than revenue, going from 23 percent to 30 percent over the same time period. Most of this is due to increased spending for interest on the growing debt. Primary (non-interest) outlays only rise by about two percentage points of GDP over the same time period, from 19.4 percent to 21.4 percent.



Even with these extraordinarily high debt numbers, there is still an optimistic assumption about health spending. The numbers show that Medicare and Medicaid spending combined would be frozen at about 8 percent of GDP from the 2050s onward. While this is consistent with the Medicare Trustees, it also relies on provider payment reductions that the Chief Actuary at the Center for Medicare and Medicaid Services views as unsustainable.

An alternative scenario with what may be more realistic assumptions about health care--albeit, ones that may actually be a little too pessimistic--has debt reaching 550 percent of GDP in 2085, with health spending taking up 23 percent of GDP. These assumptions have a growth rate of two percentage points above GDP per capita, roughly the historical average since 1960, but slightly higher than the average over the past two decades.



OMB also provides a number of other alternative scenarios. These scenarios involve fiscal variables, like different amounts of revenue, and economic variables, like productivity. Other alternatives include demographic variables like birth rates, death rates, and net immigration that also affect long-run economic performance. You can see all the numbers associated with these alternative projections in OMB's spreadsheet.

The long-term outlook shows that even though the President's budget stabilized debt at the end of the decade, it would not prevent a steep rise beyond the ten-year window. Even with optimistic health care assumptions, debt would grow to unprecedented levels by mid-century.  

Digging Holes When We Need It Least

In what is being hailed as a demonstration of bipartisanship, Congress broke its previous commitment to deficit-neutrality and agreed to a bill (HR 3630) that would dig a bigger fiscal hole. The bill, which extends the payroll tax cut, unemployment insurance benefits, and "doc fix" through the end of the year, passed the House by a 293-132 vote and passed the Senate by a 60-36 vote today. 

The payroll tax cut is the one part of the bill that is not offset, but it is also by far the most expensive, costing about $95 billion of the roughly $140 billion cost of the three major provisions. In total, CBO estimates the package expected to increase the deficit by $101 billion in 2012, and by $89 billion from 2012-2022.

The bill is partially offset with a number of policies. On the health side, the doc fix is fully offset with a $5 billion cut to the Prevention and Public Health Fund, a $7 billion reduction in reimbursements to hospitals for bad debts, and a few other policies. Unemployment insurance is offset with an increase in pension contributions for new federal employees and the auctioning of spectrum. In addition, the cost of the UI extension is decreased by reducing the maximum number of weeks a person can collect benefits from 99 to 73 weeks (in states with at least nine percent unemployment).

Components of HR 3630 (billions)
Policy 2012-2022 Costs (-)
Payroll Tax Cut Extension -$93
Unemployment Insurance Extension -$30
Doc Fix -$18
Health Extenders -$3
Health Care Reform Spending Reductions $8
Health Provider Payment Reductions $14
Spectrum Auctions $15
Federal Employee Contribution Increases $18
Subtotal, Non-interest
Interest -$32
Total -$121


All of the policies in this bill came from the original House extenders bill in December. It seems the only thing that made this bill bipartisan was simply dropping the remaining offsets that paid for the previous bill. Instead, both parties should have come together to find other agreeable offsets.

We had hoped that Congress would take some step to offset the costs associated with the tax holiday, and the result is disappointing. The main loser in this compromise is not either political party but our future fiscal health, especially if this serves as foreshadowing for December. As we continue to say, "We cannot afford anymore holidays from fiscal responsibility."

A Closer Look at the President's Tax Policy

This week, in our blog series on the President's budget, we have talked about the overall numbers in the President's budget and the amount of savings from each budget area. Today, we will go more in-depth into the largest area of savings in the budget: tax policy.

The President's budget includes about $1.6 trillion of net revenue-raising provisions over ten years (excluding the American Jobs Act). Of course, this is against a baseline that extends $4.5 trillion worth of tax cuts over the same period, but we'll stay out of baseline discussions in this blog (you're welcome). The policies are mostly familiar ones, holdovers from past budgets, but there are a few new ones.



The bulk of the added revenue comes from provisions related to the 2001/2003 tax cuts. As the President has long proposed, the tax cuts for people making over $250,000 would be allowed to expire, raising a total of $970 billion. This entails allowing the top two tax rates to rise from 33 and 35 percent to 36 and 39.6 percent, respectively; allowing the top capital gains rate to rise from 15 to 20 percent; reinstating phaseouts of the personal exemption and itemized deductions (PEP and Pease); lowering the estate and gift tax exemption from $5.12 million to $3.5 million and raising the tax rate from 35 to 45 percent; and taxing dividends as ordinary income. The only new proposal is the one involving dividends; the Administration previously treated qualified dividends in the same manner as capital gains, putting the top rate at 20 percent.

Other revenue-raising provisions involve limiting or eliminating tax expenditures. The budget raises $585 billion from the reprised 28 percent limitation on certain tax expenditures. In a change from last year's budget--but consistent with the President's Fall submission to the Super Committee--the limitation applies not only to itemized deductions, but certain above-the-line deductions and exclusions like the employer health exclusion and interest on tax-exempt bonds. 

Revenue Provisions in President's Budget (billions)
Policy 2013-2022 Savings/Costs(-)
Expiration of Upper-Income Tax Cuts $968
Tax Expenditure Limitation $584
Other Revenue-Raisers $362
Tax Gap and Simplifications $6
Tax Cuts -$359
Total $1,561


There are a number of other scattershot tax expenditure changes. The Administration, as in past years, would make many changes to international taxation, limiting certain deductions or calculation methods that individuals or companies abroad may use to the tune of $150 billion. They would also eliminate tax preferences for oil, gas, and coal, collecting an additional $30 billion in the process (not including changes to the domestic production deduction for fossil fuels). Other revenue changes include taxing carried interest as ordinary income, reinstating the tax dedicated to the Superfund, repealing "last-in-first-out" accounting for businesses, and imposing a fee on large financial institutions.

Beyond revenue raisers, the budget includes a few roughly revenue-neutral pairings and some tax cuts. As mentioned in the State of the Union, the budget would eliminate the domestic production deduction for fossil fuels (a previously used proposal) and would double the deduction for advanced manufacturers. Also, it would disallow deduction for expenses related to businesses moving operations offshore and provide a 20 percent credit for expenses associated with bringing business back to the U.S. Both of these changes are designed to be about revenue-neutral. The tax cuts involve extending some of the 2009 tax cuts, such as the American Opportunity Tax Credit and the extension of the Earned Income Tax Credit. Also, the budget includes permanently eliminating taxation of small business capital gains and permanently extending the R&D tax credit.

The backdrop to this laundry list of policies is the promise of fundamental tax reform. President Obama lays out a number of principles for tax reform: reducing marginal rates, broadening the tax base, maintaining progressivity, raising at least $1.5 trillion of revenue, and observing the "Buffett Rule" that millionaires should pay at least a 30 percent tax rate (which we had anticipated would be put in the budget as a policy).

The reform the budget discusses involves lowering tax rates and having fewer tax brackets while reducing many tax expenditures, in part by eliminating them for millionaires. In terms of progressivity, the budget states that the reformed tax code must be as progressive as a code in which the 2001/2003 tax cuts expire for high-income earners. The Buffett Rule is also held up as the replacement for the AMT, not just an add-on to the current system.

In addition, there is supposed to be a corporate tax reform plan that the Administration will put out soon, although it is not clear yet whether it will be designed to be revenue-neutral or revenue-positive.

Although the revenue-raising provisions are necessary, we would prefer them done in the context of comprehensive tax reform that has the potential to boost growth and significantly reduce the costs of administering and complying with the tax code. The Administration seems willing to go this route but has not yet put forth a plan (the promised corporate reform is really only a small piece of that).

Check out our other posts on the President's budget here

Scoring the Republican Presidential Candidates

On Thursday, February 23, CRFB’s US Budget Watch project will unveil its study of the budgetary impact of the campaign promises of the major Republican presidential candidates. RSVP for this event, which will take place at 9:30 am, to see all the analysis as well as a discussion with veteran budget experts Vic Fazio, Bill Frenzel, and Alice Rivlin. A second round including President Obama will come later this year.

The purpose of US Budget Watch is to raise public awareness of the critical fiscal issues facing the country during the election season and to bring attention to the fiscal consequences of presidential candidates’ tax and spending policies. Early in the campaign season, the project offered 12 Principles of Fiscal Responsibility for the 2012 Campaign in order to promote a constructive debate regarding our fiscal challenges and how to address them.

Budget Watch was very well received in 2008 -- moderator Bob Schieffer referred to our findings in one of the Presidential debates and other journalists used our analysis as well.

"The most detailed analysis of McCain's and Obama's budget plans comes from the nonpartisan Committee for a Responsible Federal Budget." -- CNN

"The most recent, comprehensive analysis of the candidates' spending and taxation plans [is] by the Committee for a Responsible Federal Budget." -- New York Times

If you are growing tired of mudslinging and soundbites, stay tuned next week for some substantive, objective analysis. RSVP for the release event, or watch for our tweets using #BudgetWatch.

Coburn and Burr Add to Medicare Discussion

Senators Tom Coburn (R-OK) and Richard Burr (R-NC) came out with a Medicare proposal today that adds to the list of plans out there to rein in the cost of the program. In a certain respect, the plan resembles the Domenici-Rivlin health care plan: it combines the Fiscal Commission or Lieberman-Coburn approach that makes changes within the current system with the premium support approach that changes Medicare's structure.

Step one of the bill would make a number of changes to Medicare's cost-sharing structure starting in 2014. It would adopt the Fiscal Commission proposal to create an annual deductible for Parts A and B, impose 20 percent coinsurance above that, have an out-of-pocket cost-sharing limit (which would be higher for high earners), and restrict Medigap's ability to cover cost-sharing. It would also increase Part B premiums from 25 percent to 35 percent of program costs and make millionaires pay their entire premium for Parts B and D. In addition, the Medicare retirement age would be raised to 67, a permanent "doc fix" would be enacted to ensure that physician payments aren't cut drastically by the SGR formula, and coordinated care would be used for beneficiaries who meet certain medical criteria. One drawback is that it repeals the Independent Payment Advisory Board (IPAB), which could still remain as an important backstop for making changes to traditional Medicare, even under the new system.

Starting in 2016, Medicare would be transitioned to a premium support system. Like with Domenici-Rivlin or Ryan-Wyden, traditional Medicare would compete with private insurers who offer Medicare-equivalent coverage in a competitive bidding process. The initial payment to beneficiaries for the purchase of insurance would be based on the government's share of spending in the previous year of Parts A and B, adjusted for individual health risk and income. Unlike the previously-mentioned premium support plans, the growth of these payments would not be explicitly capped but rather would be determined through the bidding process. The hope is that the changes to traditional Medicare combined with competition in the new Medicare market will restrain cost growth enough that explicit limits on payment growth would not be needed.

The Coburn-Burr proposal is a welcome addition to the Medicare debate, building on many of the previous plans that have also attempted to address the program's exploding cost. 

To read more on the proposal, click here.

What Will the Budget Look Like in 2022?

In our continued analysis of the President’s budget, we now move to a detailed examination of what the budget would look like at the end of the ten-year window in 2022 and how it would change from today.

As we wrote in our initial analysis of the President’s FY 2013 budget, as the economy recovers and proposed spending cuts go into effect, outlays will decline from 24 percent of GDP in 2012 down to 22 percent by 2018, then rise to about 23 percent by 2022. Revenues, meanwhile, would rise substantially from nearly 16 percent of GDP in 2012 to over 20 percent by 2022. By comparison, average historical revenues and outlays have been about 18 percent and 21 percent of GDP, respectively. 

Composition of Federal Spending (Percent of GDP)
  2013 2022
Security 5.2 3.4
Non-Security 2.5 1.7
Social Security 5.0 5.3
Medicare 3.0 3.6
Medicaid 2.0 2.3
Other Mandatory 4.0 3.2
Interest 2.0 3.3


But the big news over the next 10 years and beyond is how the composition of spending changes as the population continues to age and as spending on health care and interest on the debt begin crowding out other areas of the budget – leaving less room for future investment and discretion in budgeting in general.

Under the President’s proposal, total discretionary spending will shrink from 33.2 percent of the budget in 2013 to 22.1 percent by 2022. At the same time spending on Medicare and Medicaid grows from 21.2 to 22.5 percent of the budget, eclipsing spending on Social Security. And, together, those three programs will take up almost half of the total budget by 2022. Spending to service our debt (Net Interest) more than doubles between 2013 and 2022, growing from 6.5 to 14.6 percent of the proposed budget. This trend in rising interest costs will not subside so long as our debt continues to increase.



Also, as the economy recovers between now and 2022, the President’s stimulus proposals in the American Jobs Act will wind down and countercylical spending will decline. The combination of proposed stimulus and temporary tax cuts would fall from between 3 and 4 percent of total outlays (more than $136 billion) in 2013, to almost nothing by 2022. Among many other policies, the stimulus and tax measures include reform and extension of unemployment insurance, extension of the Social Security payroll tax cut, and investments in infrastructure (not counting the six-year transportation reauthorization proposal).

Additional spending reductions in the President’s budget come from the already-begun phase down of the wars in Iraq and Afghanistan (Overseas Contingency Operations, or, OCO). The estimate for total "savings" from the OCO drawdown over the 2013-2021 budget period is $848 billion (not including interest). Other sources of the decline in spending come from almost $600 billion in health and other mandatory savings, and almost $800 from implementation of the Budget Control Act discretionary caps.

Further, as the economy recovers over the next few years, federal spending levels on income security provisions will take up less of the budget – falling from 14.5 percent of the budget in 2013 to 10.5 percent in 2022. Income security programs include such things as food stamps, supplemental security income, unemployment insurance, and housing assistance, among many other support programs.

The bottom line is that the budget will become increasingly focused on health care spending and especially interest on the debt past 2022. We know one way to slow the growth of the latter: get our debt under control.

CRFB Analysis of the President's 2013 Budget

Since the release of the President’s FY 2013 budget on Monday, CRFB has provided coverage of the President’s proposal through our FY 2013 blog series. Specifically, these blogs have covered CRFB’s initial reaction, key fiscal metrics in the President’s budget, proposed budget reforms, how the budget would adhere to the discretionary spending caps specified in the Budget Control Act (BCA), and how CBO might score the budget.

Today, we continue our coverage with the release of our latest paper, which takes a look at the President’s budget as a whole in more detail.

Our analysis looks at the President’s budget's jobs proposals, discretionary and mandatory spending, tax policy and economic assumptions. Under the President’s budget, debt held by the public would rise from 68 percent of GDP in 2011 to 74 percent in 2012 and 77 percent in 2013, before declining to over 76 percent in 2018 and stabilizing at that level through 2022. Deficits would fall from 8.5 percent of GDP in 2012 to 5.5 percent in 2013, 3.0 percent in 2017, and roughly 2.8 percent annually between 2018 and 2022.

The president’s budget proposes:

  • $2.1 trillion in new revenues through 2022 relative to current policy, $360 billion in health care reductions, and $160 billion in other mandatory reductions.
  • A $350 billion jobs package, nearly $370 billion in tax cuts, and nearly $270 billion in increased spending – mostly for education and infrastructure.

These proposals, along with the discretionary caps in the BCA, the drawdown in war spending, and the economic recovery, would increase revenue from 15.8 percent of GDP in 2012 to 20.1 percent in 2022 and reduce spending from 24.3 percent of GDP in 2012 to 22.8 percent by 2022.

As we state in our report:

The President’s budget takes an important step by laying out a number of policies to stabilize the debt. Given how serious the nation’s fiscal challenges are, however, the President should have laid out a specific comprehensive plan to return the nation to a sustainable fiscal path, rather than just a first step.

Click here to read CRFB's full analysis of the President's FY 2013 budget, and click here to see the rest of our FY 2013 blog series.

A Deal to Forget on the Hill

Update: The House has approved the payroll-tax deal 293-132.

Just when you thought the conference committee might start agreeing on specific offsets for any extensions to expiring policies, they found something that too many folks in this town can agree on: deficit-financing. What is being reported as a tentative deal would offset extensions of unemployment benefits and the doc fix, but would leave the payroll tax cut to be added to the debt. That means about two-thirds of the package will be added to the deficit. That's no reason to celebrate.

So far, we know that the UI and doc fix extensions are likely to be offset by increasing federal employee pension contributions, reducing Medicare payments to hospitals for bad debts, and cutting the Prevention and Public Health Fund from the Affordable Care Act. Also, the cost of the unemployment insurance extension will be reduced by decreasing the maximum number of weeks a person can collect benefits in high unemployment areas from 99 to 73. It is unknown how much these changes would save combined, but if the total offsets add up to their intended value, that would leave the $95 billion payroll tax cut to be fully deficit-financed.

Congress needs to fully offset the costs of any extensions, no if, ands, or buts. The logic behind doing that is perfectly clear: if certain tax cuts or spending increases are too important to both parties to let expire, then lawmakers should be willing to pay for those measures. Of course, in a world with true budget constraints and trade-offs, it should be easier for both parties to find offsets for high-priority policies that they can agree to. Unfortunately, that's not the world we're in with this deal.

We need to stop living beyond our means and address rising debt head on. As we said in a statement, "We cannot afford any more holidays from fiscal responsibility."

Clear here to read CRFB's analysis on how lawmakers should responsibly deal with expiring provisions. There's still time. 

How CBO May Score the President's Budget

Last year, when the President's budget used overly optimistic economic assumptions and various magic asterisks, we re-estimated their budget using more realistic assumptions. As it turns out, our estimates were quite close to CBO's estimate of the President's budget; the President claimed to get debt down to 77 percent of GDP by 2021, we estimated it would be at 87.4 percent, and CBO found it would get to 87.5 percent.

This year, it appears to us the President's budget estimates are much more closely in line with what CBO will project -- but nonetheless we figured we'd undertake a re-estimate. To do so, we start with CBO's current law baseline -- which projects nearly $500 billion in additional deficits compared to OMB through 2022 due to worse economic assumptions. We also use CBO's estimates of extending the 2001/2003/2010 tax cuts, patching the AMT, and enacting a "doc fix" in order to reconstruct the Administration's "adjusted baseline."

And finally, we take the Aministration's policy savings estimates as provided, adjusting only for different interest rates and for a $44 billion "timing adjustment" in 2022, which adjusts for the fact that payments at the beginning of FY 2023 will be pushed into FY 2022 because of the configuration of the calendar that year. You can see the policy adjustments in the table below:

Estimate of the President's Budget (billions)
  2013-2017 2013-2022
Current Law Deficits $2,260 $2,250 $3,870 $4,340
"OMB Current Policy" Adjustments $2,130 $1,980 $5,990 $5,640
Policy Proposals -$920 -$920 -$2,770 -$2,720
Interest on Policy Proposals -$30 -$40 -$410 -$440
President's Budget Deficits $3,440 $3,280 $6,690 $6,820

Note: Numbers may not add up due to rounding

All told, as it turns out, deficits from 2013 to 2022 would likely be pretty similar if CBO were to calculate them -- $6.82 trillion instead of $6.69 trillion. This difference does mean that CBO debt projections would be higher -- but by less than one percentage point of GDP.

On top of these higher deficits, though, GDP is lower in CBO's projections. That means for any given nominal level of debt, debt as a share of GDP should be higher for CBO's numbers. When we calculate our new debt as a share of CBO's GDP projections, we find that it would reach nearly 80 percent of GDP in 2022 as opposed to less than 77 percent under OMB's assumptions.

Not a big difference, but enough to remind policymakers that they should overachieve in order to make sure slight fluctuations in the economy don't prevent the debt from stabilizing.

How the President Met the 2013 Cap

Continuing on in our blog series, we will be discussing discretionary spending proposals in the President's budget.

The FY 2013 budget was notable for being the first time that President Obama had to lay out specifically how he would adhere to the discretionary spending caps in the Budget Control Act. Prior to the budget's release, we already knew what defense spending cuts would be contained in the budget (see here for our summary). Beyond that, we had heard some scattershot investment plans, but no details on levels for discretionary spending.

Overall, discretionary spending is capped at $1.043 trillion for 2012 and $1.047 trillion for 2013; however, the Obama Administration shows discretionary spending authority at $1.058 trillion for 2012 and $1.043 trillion for 2013. Why is that? For 2012, since adjustments are allowed for disaster relief spending, the caps ended up being higher than those originally specified. For 2013, about $4 billion of transportation spending is transferred from discretionary to mandatory spending, so they have lowered the discretionary spending caps to compensate.

Still, the 2013 discretionary total is obscured because of so-called "discretionary changes in mandatory spending" that net against discretionary budget authority by $18 billion. You may remember these "CHIMPs" as a way that Congress softened the cuts to discretionary spending that took place in the final FY 2011 CR. It is not a gimmick to count CHIMPs against discretionary spending, but it does not provide the best picture for which agencies are getting funding increases or decreases.

Excluding CHIMPs, discretionary spending will increase slightly from $1.058 trillion to about $1.061 trillion in 2013, an increase of 0.3 percent. We have represented that spending in the table below.

Discretionary Spending in the President's Budget (Billions of Budget Authority)
  FY 2012 Enacted FY 2013 Request Change from 2012 to 2013
Agriculture $23.8 $24.1 +1.4%
Commerce $7.7 $8.1 +5.0%
Defense $530.5 $525.4 -1.0%
Education $68.1 $69.9 +2.6%
Energy $26.3 $27.4 +4.4%
Health and Human Services $76.2 $76.4 +0.3%
Homeland Security $39.6 $39.5 -0.5%
Housing and Urban Development $43.4 $44.8 +3.2%
Interior $11.5 $11.9 +3.3%
Justice $27.2 $27.1 -0.4%
Labor $13.2 $12.0 -9.7%
State and International $53.5 $54.9 +2.6%
Transportation $13.7 $13.8 +0.1%
Treasury $13.2 $13.4 +1.6%
Veterans' Affairs $58.5 $61.0 +4.3%
Other Agencies $51.1 $51.2 +0.0%
Total $1,057.7 $1,060.8 +0.3%

Note: The reduction in Department of Labor spending is mostly due to an accounting change and shifting a program to Health and Human Services. Taking out these changes shows a slight reduction in Labor spending.


As you can see, Departments like Education, Commerce, and Energy get sizeable increases, which is no surprise considering President Obama's emphasis on "investment" spending and help for manufacturers. Although no Department really had a major cut, the Defense, Justice, and Homeland Security Departments all had slight reductions.

The cross-cutting category of R&D is a category that gets a big boost in the President's budget. According to the text of the budget, total R&D spending is funded at $141 billion in 2013, a five percent jump from the previous year. Spending in this category includes money for the National Science Foundation, National Institutes of Health, clean energy programs, and advanced manufacturing programs.

Since the debate on discretionary spending is not really about overall levels anymore (besides discussion about the sequester), the composition of discretionary spending will become more important in the fiscal debate. President Obama has shown us one way of meeting the BCA caps.