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2013 CBO Baseline Shows Areas Of Concern

e21 | February 6, 2013

The Congressional Budget Office released their 2013 outlook of the federal budget for the next decade, which projects that today's historically huge deficits will slowly shrink to merely being very large deficits in the next decade. In the Budget and Economic Outlook: Fiscal Years 2013 to 2023, the CBO sets the baseline for Congress to use when analyzing how their policy changes will affect the government’s fiscal picture. Here are a few of the main points of interest.

Things will get slightly better, then get worse. The deficit is expected to shrink from 7.0 percent of GDP in 2012 to 5.3 percent in 2013. It will then continue to get smaller until 2015 (2.4 percent), at which point the trend reverses and deficits start to slowly creep up again. The vast majority of the deficit reduction comes from increases in revenue instead of reductions in spending. Both spending and revenue, as a percentage of GDP, will be higher than their previous 40 year averages. This chart shows how far from historical averages the current fiscal picture is.

total revenues and outlays

Only one budget baseline. In recent years, CBO produced a traditional current law budget as well as an alternative fiscal scenario. A baseline set by laws that many knew would not be followed was of limited use. The alternative scenario assumed that many of the “temporary” policies that had been made all but permanent would continue. Policies such as extending the 2001/2003 tax rates, indexing the alternative minimum tax, avoiding the Medicare “doc fix”, etc, were passed because a permanent solution had yet to be found. The fiscal-cliff deal (the American Taxpayer Relief Act of 2012) created a permanent fix for enough issues to allow the CBO to dispense with the alternative.

Entitlement reform is needed today, not tomorrow. Many economists believe that we should avoid spending cuts while the economy is struggling because austerity will hamper economic growth. e21's Chuck Blahous has argued that entitlement reform is necessary now, and not in the future, because the sooner any cuts happen, the easier the transition will be for retirees and near-retirees.  CBO seems to agree:

Under current law, the aging of the population, the rising costs of health care, and the scheduled expansion in federal subsidies for health insurance will substantially boost federal spending on Social Security and the government’s major health care programs, relative to GDP, for the next 10 years and for decades thereafter. Unless the laws governing those programs are changed—or the increased spending is accompanied by corresponding reductions in other spending, sufficiently higher tax revenues, or a combination of the two—debt will rise sharply relative to GDP after 2023. Deciding now what policy changes to make to resolve that long-term imbalance would allow for gradual implementation, which would give households, businesses, and state and local governments time to plan and adjust their behavior.

The dangers of a large public debt. Just because countries are able to muddle through with very high debt-to-GDP ratios doesn't mean they aren't dangerous. CBO outlines several reasons for concern, among them:

Policymakers' ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns, natural disasters, or financial crises will be constrained. As a result, unexpected events could have worse effects on the economy and people's well-being than they would otherwise.

The likelihood of a fiscal crisis will be higher. During such a crisis, investors would lose so much confidence in the government's ability to manage its budget that the government would be unable to borrow funds at affordable interest rates.

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