CBO Really, Really Makes the Case For Strict Pay-As-You-Go Budgeting

Based on CBO's Long Term Outlook, one could conclude solely based on the debt levels projected that either we were headed on a sustainable path, with debt actually being paid off around 2070 (the Extended Baseline scenario), or we were headed for absolute disaster, with debt rising exponentially to 935 percent of GDP 75 years from now (the Alternative Fiscal Scenario).

As you can expect, CBO's policy assumptions for each scenario differs widely. The Extended Baseline assumes current law, or that many temporary policies expire and the sequester is turned off. The Alternative Fiscal Scenario assumes the opposite. Below we have showed how each difference in policy contributes to higher or lower debt.

These policies are:

• Tax Cuts: This area represents the accumulated debt of extending the 2001/2003 tax cuts, which happens only in the AFS.
• AMT Patch: The AMT patch assures that millions of middle class households do not get pushed into the alternate tax system that is intended only for upper-income taxpayers. The Extended Baseline assumes that this patch doesn't happen, while the AFS includes it.
• Sequester: Under current law, domestic and defense spending will be automatically cut across the board starting in 2013. The AFS assumes that this policy is repealed.
• Health Care Cost Controls: CBO's Extended Baseline assumes that certain cost saving provisions of the health reform law--specifically, the Medicare "productivity adjustments" cuts and the growth-slowing aspects of the exchange subsidies--stay in effect through 2029. The AFS, however, assumes these provisions stay in effect only through 2022.
• Doc Fix: Under current law, Medicare physician payments are scheduled to be cut by 27 percent next year due to the Sustainable Growth Rate (SGR) formula. The AFS assumes that the SGR is repealed and a "doc fix" is enacted to freeze payments at 2012 levels through 2022.
• Tax Extenders: Under current law, a number of temporary "tax extenders" either have already expired or will expire in the coming years. The AFS renews these tax extenders, retroactive to last year for those that have already expired.
• Revenue Freeze: Over time, certain features of the tax code tend to push up tax revenue as a percent of GDP. The Extended Baseline reflects this fact, but the AFS keeps revenue constant as a percent of GDP after 2022, essentially assuming that lawmakers will continually act to keep revenue at that level.
• "Other" Spending Historical Average: Under the Extended Baseline scenario, non-health and non-retirement spending ("other spending") is held constant as a percent of GDP at its 2022 level. The AFS assumes that this spending is ramped up to its 40-year average share of GDP after 2022, which is roughly two percentage points higher than where it is in 2022.

The graph below shows the result of all of these differences in the two baselines, with current law debt as a percent of GDP representing the lower bound and AFS debt the upper bound. In case you have difficulty reading the legend, the policies from bottom to top go from right to left in the legend starting at the bottom (i.e. tax cuts, then AMT patch, etc.).

^{Source: CBO, CRFB
Note: "Tax Cuts" include interaction with the AMT patch}

Obviously, in just looking at debt, current law is much better. But the reason CBO makes an alternate scenario in the first place is because many of the policies in current law are unlikely to occur or are specifically made temporary to hide their true costs (think AMT patch or doc fix). Ultimately, a debt plan should adhere to current law debt levels by the end of the ten-year window with more backloaded savings and much better policies; in other words, they would replace the fiscal cliff. Beyond that, lawmakers would ideally focus on policies whose savings would get larger over the long term--particularly those having to do with health care spending.

Overall, CBO makes the case that adhering to PAYGO budgeting over the long term would be very good for the budget and the economy.