CBO Releases January 2011 Ten-Year Outlook

CBO today released its new budget and economic update, showing higher ten-year deficit and debt projections from 2012 to 2021 than they predicted back in August. The 2011 deficit is projected to be the highest in history (in nominal dollars), $1.48 trillion, while the ten-year deficit is close to $7 trillion, up by about $725 billion from where it was in August. Under the current law baseline, debt as a percent of GDP climbs to 76 percent by 2020, significantly higher than the 69 percent in the last projection.

Compared to August, outlays are actually lower over a comparable period. This is mostly due to the fact that 2011 discretionary spending levels have been set at 2010 levels in the continuing resolutions. Overall, outlays will remain elevated throughout the ten-year window, never falling below 23 percent of GDP.

Revenues are, as expected, much lower than the August update projected. Over the 2011-2020 period, revenues are $2 trillion lower in the January baseline. This is partly caused by the tax cut act passed last December, which will lower revenue by $721 billion (and increase outlays by $136 billion), but is more caused by to a downward revision of the economic assumptions. CBO's more pessimistic assumptions lowered revenue by almost $1 trillion.

So, what about those economic assumptions? Because of the tax cut deal, growth in 2011 is bumped up to 2.7% from 2.1%. However, presumably due to some provisions of that deal expiring (payroll tax cut and unemployment benefits) and less than expected growth in general, growth in 2012 will actually be lower than CBO predicted in August. Furthermore, when the entire act expires, as it is scheduled to do under current law at the end of 2012, growth in 2013-2015 will also be more subdued. The unemployment rate, even with the tax cut act, is in fact projected to be higher than it was previously--9.4% in 2011 and 8.4% in 2012, compared to 9.0% and 8.1% respectively. CBO's increased pessimism is likely more attributable to prudent projecting rather than any perceived deterioration in the economy since August, especially considering that optimism has been increasing about the recovery's strength in the past few months.

Also of note, this current law baseline comes with the standard disclaimer: even these bad deficits are extremely optimistic. CBO must assume no changes in current law, so it assumes that all provisions of the tax cut act expire in 2011 or 2012 accordingly, that Medicare physician payments will face a 28 percent cut in 2012, the AMT will go unpatched and spending on the Wars in Iraq and Afghanistan will continue as they are currently, even with a withdrawel scheduled. Since all of these will most likely not happen, CBO thankfully provides the cost of these policies that would affect the baseline. We used these estimates to construct our CRFB Realistic Baseline. Under this baseline, deficits over ten years total $10.5 trillion and debt as a percent of GDP reaches 92 percent by 2021.

This chart is quite sobering. As a result, as CBO Director Elmendorf said today:

[T]o prevent debt from becoming unsupportable, the Congress will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches.

We could not agree more. And the sooner the better.