Introducing the Latest CRFB Realistic Baseline
In our paper, "What We Expect From the Upcoming Fiscal Discussions," we referenced our latest official CRFB Realistic baseline. Although we have cited new Realistic projections prior to this paper, those estimates were "rough cuts" which did not fully incorporate all the changes in CBO's latest budget projections.1
For background, CBO produces a current law baseline which is generally based on the law as it is written, and they produce an alternative fiscal scenario (AFS) baseline which assumes policymakers extend a number of deficit-increasing current policies. Yet there is a case to be made that the current law scenario is too optimistic about the future in some areas, and the AFS too pessimistic in other areas.
The CRFB Realistic baseline is an effort to construct what we think is a more likely portrayal of current policy. Of course, as we have discussed before, different observers may interpret current policies in different ways. Our baseline, which is the same as the baseline used by the Center on Budget and Policy Priorities (CBPP), differs from current law by assuming:
- Repeal of the sequester after 2013, with the sequester remaining in place for FY 2013
- A permanent extension of several tax credit expansions scheduled to expire in 2017
- Permanent repeal of the Sustainable Growth Rate, which requires a 25 percent reduction to Medicare physician payments in 2014, a patch which is often referred to as the “doc fix"
- A drawdown of war spending closer in line with current plans, instead of having funds grow with inflation from current levels
- A correction of the CBO current law projection of disaster relief, removing the assumption that temporary Hurricane Sandy relief spending will grow annually with inflation
Debt under these more realistic projections is projected to drop to a low of 71.9 percent of GDP in 2018 before rising to 75.5 percent by 2023; this is somewhat lower than and certainly an improvement from our prior projections of at 79 percent, though as we've explained before roughly half the difference is due to one-time rather than structural effects. Compared to CBO current law, which assumes sequestration remains in effect among other policy changes, the CRFB realistic outlook is slightly worse, although debt is on an upward trajectory at the end of the decade under both baselines.
The graph below shows the CRFB Realistic baseline and a few variants. The lower bound of the shaded area (71 percent of GDP in 2023) represents debt under CRFB Realistic assuming the sequester remains in place, and the upper bound (78 percent in 2023) represents CRFB Realistic debt assuming the temporary "tax extenders" are also extended.
Debt Under CRFB's Realistic Baseline
Our most recent CRFB Realistic projection uses a slightly different treatment of sequestration than in February: the cuts remain in effect for 2013, since they have been allowed to take effect already, while the sequester is repealed for 2014 and beyond (see here for a discussion of how to treat the sequester). Although this is by no means an obvious choice, it is meant to reflect the reality that both parties have more-or-less conceded spending at post-sequester levels for 2013 but have made no such agreement for 2014. In fact, as we explained in today's paper, both the House and the Senate are currently writing appropriations bills which would violate the sequester law, though in very different ways.
The table below shows a bridge of the policy differences between CBO's current law baseline and CRFB's Realistic baseline and the resulting Realistic budget metrics. Spending would fall from 22 percent of GDP in 2014 to 21.5 percent in 2017 before rising to 22.7 percent of GDP by 2023. Revenues would rebound as the economy continues to recover, from 18.3 percent to roughly stabilizing around 19 percent.
|CRFB Realistic Baseline Deficits (billions)|
|Current Law Deficit||-$560||-$378||-$432||-$482||-$542||-$648||-$733||-$782||-$889||-$895||-$6,340|
|Enact "Doc Fix"||-$9||-$13||-$13||-$13||-$13||-$14||-$15||-$16||-$17||-$17||-$139|
|Reduce Troops in Afghanistan||$15||$34||$46||$54||$57||$61||$62||$64||$66||$67||$526|
|Draw Down Disaster Spending||$2||$10||$18||$26||$31||$36||$39||$41||$43||$45||$291|
|CRFB Realistic Deficit||-$611||-$436||-$480||-$521||-$579||-$707||-$791||-$838||-$935||-$938||-$6,836|
|Spending (% of GDP)||21.9%||21.7%||21.7%||21.5%||21.6%||21.9%||22.2%||22.3%||22.8%||22.7%||22.1%|
|Revenues (% of GDP)||18.3%||19.3%||19.2%||18.9%||18.8%||18.7%||18.7%||18.8%||19.0%||19.1%||18.9%|
|Deficits (% of GDP)||-3.7%||-2.5%||-2.6%||-2.6%||-2.8%||-3.2%||-3.5%||-3.5%||-3.8%||-3.6%||-3.2%|
|Debt (% of GDP)||76.5%||75.2%||73.6%||72.2%||71.9%||72.3%||73.0%||73.7%||74.7%||75.5%||N/A|
The trajectory of debt at the end of the decade in our most recent CRFB realistic baseline and the one produced in February are similar, even though levels may be lower. As we said in our analysis of the new budget outlook, the majority of changes affect the first two years, but do not leave us much closer to putting debt on a downward path. The short-term budget outlook has improved, but our long-term debt problem is still far from solved and additional savings will be needed.
1 A special thanks to Richard Kogan of the Center on Budget and Policy Priorities who helped us work through some particularly difficult technical issues related to this baseline.