The CRFB Realistic Projections

Analyses of the CBO budget baseline generally focus on the current law baseline, the one that CBO presents in most detail. In the past, we constructed a CRFB Realistic baseline to account for many policies scheduled to expire/happen in current law that we thought were unrealistic. The Realistic baseline showed a much worse fiscal outlook than the current law baseline.

With the American Taxpayer Relief Act passing, the biggest part that made our baseline diverge from current law -- the extension of the 2001/2003/2010 tax cuts and Alternative Minimum Tax patch -- has been baked permanently into the regular baseline. Still, there are some policies that make having an alternate baseline necessary.

CBO publishes their own Alternative Fiscal Scenario which include some remaining current policies, most notably the sequester. Still, the CRFB Realistic baseline includes a few more adjustments which reflect what we and many budget experts think is the most likely current policy path. It differs from the current law baseline in the following ways:

• It permanently repeals the sequester that is set to take effect at the beginning of next month.
• It extends the refundable tax credit expansions that are set to expire in 2017.
• It makes permanent the "doc fix" that prevents a 25 percent cut to Medicare physician payments scheduled to take place in 2014.
• It assumes that war spending is drawn down, rather than grown with inflation from current levels.
• It assumes that Hurricane Sandy disaster relief spending is "drawn down" in future years, rather than grown with inflation from the levels contained in the emergency supplemental bill.
• It accounts for timing shifts that push some outlays that would otherwise be made in a given year to the previous year. This usually happens because October 1, the first day of the fiscal year, falls on a weekend, forcing the government to push payments into September.

^{Source: CBO, CRFB extrapolations}

As you would expect, the CRFB Realistic baseline is in between the two CBO baselines. Ten-year deficits total $7.4 trillion (3.5 percent of GDP), and debt rises to 79 percent in 2023. Spending in those ten years totals 22.3 percent, while revenue averages 18.8 percent.

^{Source: CBO, CRFB extrapolations}

Compared to the previous Realistic baseline based off CBO's August projections, the budget forecast is slightly improved. Debt is now 78 percent of GDP in 2022, rather than 81 percent, and deficits are 0.4 percentage points lower on average over the ten-year period.

^{Source: CBO, CRFB}

Now that current law has converged significantly towards the current policy baselines, the message is clear: debt isn't coming down even with a full economic recovery. We must act so that debt will be on a sustainable path over the longer term.