With the Budget Control Act now in the books, it's time for us to update our CRFB Realistic Baseline from our projections a month ago. In addition to the discretionary spending caps contained in the legislation, we will also incorporate the effects of the final CR (which were excluded from CBO's Long Term Outlook and, thus, our original baseline).
To refresh your memory, our baseline contains a number of adjustments to current law that are very likely to occur. We assume that all of the 2001/2003 tax cuts are extended, the AMT is patched continuously, Medicare physician payments are frozen instead of cut by 30 percent (the "doc fix"), and the wars are gradually drawn down. Compared to a "current law" baseline, these policies (and the subsequent interest costs or savings) add an extra $3.6 trillion to the deficit over the next decade.
Based on this information, back in March, we concluded the deficits could total $10.3 trillion over the next decade, instead of $6.7 trillion.
The passage of the Budget Control Act, though, reduces that number somewhat. Compared to March, the new discretionary caps and spending cuts enacted in April should reduce deficits by $1.1 trillion over the next decade.
|Bridge from Current Law to CRFB Realistic Baseline|
|CBO March Baseline Deficits||$6,738|
|Tax Cuts Extended and AMT Patched||$3,820|
|Doc Fix Passed||$298|
|March CRFB Realistic Deficits||$10,342|
|April CR Cuts||-$122|
|Post-BCA CRFB Realistic Deficits||$9,281|
As a result of these changes, total deficits under our Realistic Baseline would be $9.3 trillion through 2021, compared to $10.3 trillion under our previous estimate. And debt as a percent of GDP would be 86 percent in 2021 as opposed to 90 percent.
|New CRFB Realistic Baseline Deficits and Debt|
|Deficits (% GDP)||6.7%||5.0%||4.2%||4.3%||4.6%||4.3%||4.3%||4.6%||4.8%||4.8%|
|Debt (% GDP)||73.2%||75.8%||76.8%||77.6%||78.9%||80.2%||81.4%||83.0%||84.7%||86.3%|
Budget Control Act also includes a "Super Committee" to recommend $1.5 trillion in deficit reduction, with a $1.2 trillion trigger scheduled to cut spending automatically if the Super Committee or balanced budget amendment do not succeed. We do not include the success of the Committee or the activation of the trigger in our Realistic Baseline. Including the savings from the automatic trigger would bring the debt down to 80 percent of GDP in 2021. If, on top of that, the upper income tax cuts were allow to expire in 2013, this would result in roughly $800 billion of further defict reduction compared to our Realistic Baseline, bringing the debt down to 77 percent by 2021.
Even if the Super Committee succeeds or the automatic spending cuts take place and the upper-income tax cuts are either not extended or paid for, debt will still remain far above historical norms and will not be on a declining path. Clearly, we need to do more.