The Costs of Current Policies

This morning, we released our review of CBO's Analysis of the President's Budget, which discusses the budget implications of the President's FY 2011 budget proposals in detail, including the new deficit and debt projections and the path of revenues and outlays. However, the CBO did not update its economic assumptions from the January 2010 baseline. The story is, once again, the same -- CBO's "current law" baseline projections are quite bad, "current policy" projections -- where policies which are likely to continue do -- are devastating.

As we explained in our paper, CBO's March 2010 baseline makes a number of unlikely assumptions:

• It assumes the 2001/2003 tax cuts will all expire at the end of 2010 -- even though most politicians want to either renew all of them, or all of them for families making under $250,000 a year.
• It assumes policymakers will end the regular practice of "patching" the Alternative Minimum Tax (AMT) -- and instead they will allow it to reach down to middle-class tax payers.
• It assumes Medicare physician payments will not be updated as they have in recent years -- and instead will be cut by 21% this March and further thereafter.
• And finally, they assume that discretionary spending (including for Iraq and Afghanistan) will grow at the rate of inflation -- even though it has grown significantly faster, historically speaking.

In addition, recently passed legislation, such as the health care reform bill and a recent jobs-targeted bill have not yet been added to baseline forecasts. The CBO understands its assumptions may be unrealistic, and so provides readers with the information to make their own assumptions. We've generated our own "current policy" baseline, and the results aren't pretty. This is an update from a current policy baseline we previously constructed; changes include CBO's updated baseline, newly enacted legislation -- the health care reform act and the HIRE act -- and updated interset estimates:

^{*This refers to a number that is less than $1 billion.}

^{**This adjustment is not available in the Budget and Economic Outlook, and so has been taken from a recent CBO estimate.}

^{Note: Numbers may not equal totals, due to rounding.}

Instead of cumulative deficits of $6 trillion over the next decade, under this scenario we are talking about $12.2 trillion (this number is down from our $12.4 trillion estimate from the January Outlook). The Bush tax cuts are the biggest culprit in this increase, adding about $2.5 trillion to the ten-year deficit (more if you consider the interaction effect with the AMT). If discretionary spending were to grow with GDP (something which we hope will not happen in light of the recent calls for a freeze), which is slower than it has over the last decade, that would also contribute quite significantly -- adding $1.8 trillion to the deficit, including $352 billion in the last year alone. And finally, as the debt grows, the annual interest costs of servicing the debt balloon to over $279 billion in 2020.

So what does this all mean? Well, this graph shows the debt held by the public under current law and current policy:

Under current law, the debt will hit 68 percent of GDP by 2020. That number is well above our historical averages, and somewhat higher than the 60 percent recommended by the Peterson-Pew Commission on Budget Reform, the Committee on the Fiscal Future of the Nation, and the IMF. It will likely slow economic growth, stifle our capacity to budget, and it increases the risk that we will face a fiscal crisis -- especially since debt will be on an upward trajectory beyond the ten-year budget window. But other countries have found ways to manage similar levels of debt, and we probably would too if we could stop the debt from growing beyond that level.

Under current policy, the debt hits 68 percent by 2011. Not long after 2020, it will hit 100 percent of GDP. At that level, we are in serious danger; the chances of a severe economic and fiscal crisis increase significantly, and our capacity to reverse course quickly diminishes.