Yesterday, we argued that to actually stabilize the debt as a share of the economy, you probably need to propose a plan with even more savings than what would stabilize the debt under current projections. The risks come from both the economic and political uncertainties:
Last week, in our analysis of the President's submission, we noted how the President's submission to the Super Committee nearly stabilizes debt, but not fully, this decade and how much more will be needed to actually put debt on a clear downward path.
We stated that:
With President Obama's deficit reduction plan now officially out, it's worth comparing the debt path under this plan to other debt paths. For the comparison graph below, we have thrown in CBO's August baseline (excluding the trigger included in the Budget Control Act), the Fiscal Commission, and CRFB's Realistic baseline.
Under the Administration's Mid-Session Review, the gap between spending and revenues is set to persist throughout the decade with barely any change in that gap, even if potentially $1.5 trillion in savings from the Super Committee materializes. Also noteworthy is that both spending and revenues will exceed their historical averages over the past few decades of about 21 percent of GDP for spending and about 18 percent of GDP for revenues.
OMB has just released its Mid-Session Review, incorporating the effects of the Budget Control Act and the Super Committee's target savings into its projections. The MSR shows significant improvement compared to the President's Budget, although deficits obviously are higher than under CBO's current law estimates.
Although CBO shows debt improving significantly over the coming decade, reaching 61 percent of GDP in 2021, debt will not follow this downward path without lawmakers putting in place specific debt reduction measures. As we have showed in our CRFB Realistic Baseline, debt is much more likely to grow to 82 percent of GDP by 2021 given that they are likely to continue extending the tax cuts and other policies.
CBO's updated economic and budget projections, released this morning, show for the first time in many years a declining debt path under current law. Unfortunately, these projections are wildly optimistic, given that they assume things like the tax cuts and AMT patches expire in 2013. But we'll take whatever progress we can get!
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).
Budget projections are a rather fickle thing, especially in the midst of great uncertainty about the strength of the economic recovery. By accident, CBO is providing a great demonstration of this fact in trying to get the numbers right for 2011.