CRFB's newest paper dives into the set of projections underlying CBO's Long Term Budget Outlook. The report shows two very divergent paths for the budget over the long-term, both of which would present formidable challenges for the U.S. economy for very different reasons.
Under the Extended Baseline scenario, which assumes that many temporary policies expire and the sequester is put into effect (the "fiscal cliff"), debt is projected to be on a sustainable path. It falls from 73 percent of GDP in 2012 to 61 percent by 2022, then continues to fall to 36 percent by 2050. Eventually, by 2070, the national debt is projected to be paid off. Looks good, right? Of course, this scenario entails a number of policies that are likely to be overridden, including policies that are intentionally made temporary to hide their true effect on the budget. The scenario would also be terrible for the short-term economy due to the poor timing and abruptness of the savings and not ideal for the long-term economy given the nature of the policies involved.
Under the Alternative Fiscal Scenario (AFS), those temporary policies are continued and the sequester is turned off. In addition, total revenue and non-health, non-retirement spending are frozen at roughly their historical averages over the long-term. As a result, debt explodes from 73 percent of GDP in 2012 to just under 250 percent by 2042, the last year in which CBO details their debt projections. Our extrapolation of this scenario shows debt continuing to rise out of control to about 620 percent by 2070 and 934 percent by the end of the 75-year window.
The levels in the more realistic AFS would almost certainly cause a debt crisis at some point in the not too distant future. Before then, however, debt would crowd out private savings, hurting real GDP to the tune of somewhere around 2 percent fifteen years from now and 7 percent 25 years out.
Ultimately, as our paper states:
Policymakers should strive to enact a debt and deficit path which looks like the Extended Baseline Scenario over the long-run, yet achieves these savings in a gradual, thoughtful, and credible way. Such a plan could inspire confidence for the business sector and credit markets while also leaving a better economy for future generations.
Click here to read the full paper.