Spending and revenues in the long-term outlook is always an interesting topic to discuss. Just like with debt, you find words and phrases like "unprecedented" or "extraordinarily high" used frequently. In this blog, we'll use those words a number of times while showing spending and revenue levels under the Extended-Baseline Scenario and Alternative Fiscal Scenario (AFS).
We noted in our release yesterday that both baselines project extraordinarily high levels of spending. The Extended-Baseline has spending at 27 percent of GDP in 2035, 29 percent in 2050, and 33 percent in 2080. The Alternative Fiscal Scenario has spending rising even higher. It hits 34 percent of GDP in 2035, 43 percent in 2050, and a shocking 70 percent in 2080.
As you can see from the graph and numbers above, there is a massive difference between the AFS and the Extended-Baseline, especially with regards to spending. Our blog yesterday explained that a number of assumptions in the AFS result in higher spending (especially health spending) than the baseline. However, differences in health care spending between the scenarios do not account for most of the difference; primary spending is only about two percentage points of GDP higher under the AFS. The bigger difference is in interest costs: the Extended-Baseline has net interest payments of 3.6 percent of GDP in 2080, while the AFS has interest at a cartoonish 38 percent of GDP in 2080. Higher primary spending does contribute to higher interest costs a little bit in the AFS, but it is mostly explained by drastically lower revenues.
The Extended-Baseline manages to keep debt manageable by having revenues continue to grow, eventually reaching 30 percent of the economy by 2080. We noted last year that revenue levels increased significantly over the long-term due to the tax increases in the health care law, and revenue has remained at about the same level this year. It rises from 15 percent of GDP this year to 23 percent in 2035, 26 percent in 2050, and 30 percent in 2080. These levels are unprecedented; revenue has never been above 21 percent of GDP and it has averaged about 18 percent over the past 40 years. In contrast, the AFS holds revenue constant as a percent of GDP after 2021 at 18.4 percent. This is near the historical average but well below the current law baseline.
These statistics show what we always knew: neither baseline represents a good path for fiscal policy. The Extended-Baseline does hold debt to reasonable, albeit high, levels, but does so with unrealistic policy assumptions and an unprecedented size of government. The Alternative Fiscal Scenario has absurd debt and spending levels, with revenues remaining fixed as a share of the economy over the long-term. No matter how you slice it, we need a fiscal plan soon.