CRFB's New Realistic Baseline

Yesterday, CRFB released its analysis of the latest budget projections from CBO, discussing debt, deficits, spending, and revenues. We also updated the CRFB Realistic Baseline in our analysis to give a more realistic view of where the country is headed. Not surprisingly, it shows much higher debt and deficits than CBO's current law projections. As we stated in our report, these more realistic projections show the urgent need for a fiscal plan:

Current law projections may appear to be sustainable, but this sustainability would be achieved through unwise and unrealistic changes to the budget – changes that Congress has not allowed to occur in the past. Lawmakers must act soon to put in place a fiscal plan that stabilizes and reduces the debt trajectory as a share of the economy – one that relies on smart spending and revenue decisions and not blunt, across-the-board cuts.

The graph below shows the added costs/savings of policies that are likely to be continued, but are not in current law projections. The interest costs/savings are included within each policy in the graph. As a side note, the savings from the war drawdown are represented within the "Current Law" area, since it is the difference between the current law baseline (which assumes that war costs grow with inflation) and the baseline with the drawdown.

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Not surprisingly, extending the 2001/2003/2010 tax cuts comes with the biggest price tag, projected to cost $2.8 trillion from 2013-2022. Patching the AMT will cost $800 billion, and the interaction between the tax cut extension and the AMT patch totals another $900 billion. Combining the effects of all three yields a revenue loss of $4.6 trillion ($5.4 trillion including interest costs). Should lawmakers turn off or dismantle the sequester, it would add another $1.2 trillion to the debt this decade -- something that should only be done if lawmakers have agreed to savings equal to or larger than those mandated.

The doc fix is less costly, but still expensive at just over $300 billion. Savings from assuming that the war in Afghanistan will be drawn down as scheduled are also significant, totaling about $850 billion.

The spending and revenue paths in CRFB's Realistic Baseline obviously show a much greater divergence than under current law. Turning off the trigger and the SGR push outlays up and the tax cuts and AMT patches lead to a significant drop in revenue. The result is deficits averaging 4.5 percent of GDP instead of 1.5 percent under current law over the next ten years. 

So it's still very clear -- the country is on an unsustainable path, which is now slightly worse than we projected last August (back then, we projected debt hitting 81 percent of GDP in 2021). The longer we wait, the more difficult the solutions become. But we also run the risk of letting the debt trajectory continue to worsen, as we see now.

Click here to read our full analysis.