With the release of CBO's Long-Term Outlook, we thought it would be useful to break down the assumptions that the Extended-Baseline and the Alternative Fiscal Scenario make. Considering the huge divergence in the debt paths of these two scenarios, it is important to understand what they do.
First, we'll go through the paths of both of them. The Extended Baseline has debt as a percent of GDP rising to 87 percent by the 2040s, but it declines after that to 75 percent of GDP by 2085. CBO only provided debt data for the Alternative Fiscal Scenario through 2036, when debt exceeded 200 percent of GDP, but our extrapolation of the data has debt rising exponentially to 880 percent by 2085.
The difference in assumptions between the two baselines are detailed in the table below.
|Description of Differences in the Baselines|
|Area||Description||Extended Baseline||Alternative Fiscal Scenario|
|Doc Fix||Current law calls for a 30 percent cut to physician payments in 2012, but Congress has always overriden scheduled cuts in the past.||Assumes the 30 percent cut takes place and the SGR continues to take effect||Continues doc fixes through 2021 at nominal 2011 levels; CBO estimated this would cost $300 billion over ten years|
|Health Care Reform||The health care reform law has a number of provisions that could affect health care spending, but there are questions about their sustainability.||Assumes that provider payments are reduced by economy-wide producitivity, IPAB cuts take effect, and exchange subsidy growth slows as scheduled. Also assumes slow down in cost growth of health programs||Assumes that none of these provisions are in effect after 2021 and assumes prior (higher) cost growth|
|Tax Cuts||There is great uncertainty about what will happen with the 2001/2003/2010 tax cuts when they expire.||Assumes the expiration of the tax cuts in 2012 and no patching of the AMT||Assumes extension of all tax cuts, estate tax at 2011/2012 parameters, and patching of the AMT|
|Long Term Revenue||CBO uses different assumptions for how revenue grows past this decade.||Uses current law to project revenue; bracket creep and health insurance excise tax push revenue up to 30% of GDP||Holds revenue constant as a percent of GDP at 2021 levels (18.4%)|
|Other Spending||Other mandatory spending and discretionary spending are projected differently under each baseline||Grows as scheduled under current law baseline until 2021, remains constant as a percent of GDP after that||Grows mandatory spending as scheduled, grows discretionary spending with GDP through 2021; total category remains constant as a percent of GDP after that|
So which baseline is more realistic? Well, they both have their flaws. The Extended Baseline is very unrealistic in terms of policies and long-term revenue levels. However, the Alternative Fiscal Scenario may be too pessimistic on the tax cuts and ACA's ability (and Congress's willingness) to control health care spending, and their assumption on long-term revenue being 18.4 percent of GDP might not pan out. Nonetheless, it's easy to say that the Alternative Fiscal Scenario is probably a lot closer to where we are going, even if it has some flaws.
But, CRFB will be updating its Realistic Baseline, which we feel is the best representation of a long term baseline. Last year, our baseline basically split the difference between the two CBO baselines over the long term. We'll see how it turns out this year.