APPENDIX
B
Changes in CBO’s Long-Term Projections Since December 2007
The long-term paths of outlays, revenues, health care spending, and debt that this report presents are similar to those published in the Congressional Budget Office’s (CBO’s) 2007 long-term outlook.1 However, CBO now projects that in fiscal years 2009 and 2010, federal spending will be extraordinarily high and revenues will be unusually low. As a result, deficits in those years will be extremely large, an outcome that was not foreseen in 2007. Federal debt as a percentage of gross domestic product (GDP) is now projected to soar even in the short run.
Changes in Projections Under the Extended-Baseline Scenario
The extended-baseline scenario adheres closely to current law, following CBO’s baseline budget projections for the first 10 years and then extending the baseline concept for the rest of the long-term projection period.
In 2020, primary (noninterest) spending in CBO’s current projections is about 1 percentage point of GDP higher than it was in the 2007 projections, but that gap shrinks in later years (see Figure B-1). The difference stems primarily from an assumption that spending for programs other than Social Security, Medicare, and Medicaid will be higher; in CBO’s current projections, that spending relative to GDP is consistently 0.8 percentage points higher than it was in 2007. Most of that difference arises because projected discretionary spending is greater, as a percentage of GDP, at the end of the 2009–2019 period. For the first few decades that the new projections cover, federal spending for Medicare is also slightly higher as a share of GDP because, compared with the 2007 projections, CBO’s current estimates of GDP have declined by a greater amount than have projections of Medicare spending. However, CBO now assumes a slightly faster slowdown in excess cost growth for Medicare and Medicaid (that is, in the amount by which the rate of growth of the programs’ costs per beneficiary—after an adjustment for age—exceeds the growth of GDP per capita) than it did in 2007, so after 2055, projected federal spending for Medicare and Medicaid is lower than it was in 2007. Projected outlays for Social Security in 2030 and later are also lower—by an average of 0.3 percentage points relative to GDP—than in the 2007 projections, primarily because of changes in assumptions about the number and age distribution of future immigrants that resulted in higher projections of GDP.2 The net effect of those changes is that CBO’s current projections of total noninterest spending for 2060 and later are similar to the ones it made in 2007.
Revenues and Spending Excluding Interest Under CBO’s Extended-Baseline Scenario
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections and then extending the baseline concept for the rest of the projection period.
In general, CBO’s current long-term projections of revenues as a share of GDP are marginally higher than its 2007 estimates (see Figure B-1). The new projections of individual income taxes are higher because of more recent data on tax returns and pension holdings. However, that increase is moderated by reductions in projections of individual income tax receipts stemming from updates in CBO’s economic forecast since the 2007 report and from technical changes in CBO’s tax models. Changes in the way CBO estimates estate taxes also result in lower revenue projections today than in 2007. Nevertheless, on net, projected federal revenues at the end of the projection period are 0.5 percentage points higher relative to GDP than they were in 2007.
Federal debt is now projected to be much greater relative to GDP than it was in 2007 (see Figure B-2). That change has occurred mostly because of new projections of extraordinarily high short-term deficits but also because of higher projected primary spending over the long term. In 2007, CBO projected that under the extended-baseline scenario, debt would fall substantially as a share of GDP, to 11 percent in 2025, and would not reach 100 percent of GDP until 2063. In CBO’s current projection, debt would remain elevated and cross the 100-percent-of-GDP threshold in 2042.
Federal Debt Held by the Public Under CBO’s Extended-Baseline Scenario
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections and then extending the baseline concept for the rest of the projection period.
Changes in Projections Under the Alternative Fiscal Scenario
The alternative fiscal scenario represents another interpretation of what it would mean to continue today’s fiscal policy. This scenario deviates from CBO’s baseline even during the first 10 years of the projection period because it incorporates some policy changes that are widely expected to occur and that policymakers have regularly made in the past.
The pattern of differences between CBO’s current and 2007 projections of spending under the alternative fiscal scenario is almost the same as under the extended-baseline scenario, although the variations from the 2007 projections are marginally smaller under the alternative view. After 2020, spending for programs other than Social Security, Medicare, and Medicaid is projected to be 0.6 percentage points higher (relative to GDP) than CBO estimated in 2007, rather than the 0.8-percentage-point difference that results under the extended-baseline scenario (see Figure B-3).
Revenues and Spending Excluding Interest Under CBO’s Alternative Fiscal Scenario
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Note: The alternative fiscal scenario deviates from CBO’s baseline projections by incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past.
Projections of revenues as a share of GDP for 2020 are the same as those CBO made in 2007. However, the projected growth of revenues is higher in the current projections than it was in CBO’s 2007 estimates because projected receipts from individual income taxes are higher for the same reasons that apply to such projections under the extended-baseline scenario (see Figure B-3). Projections of individual income tax revenues—and thus of total revenues—in 2080 relative to GDP are 1 percentage point higher than they were in 2007. (Under the alternative fiscal scenario, revenues from the estate tax are assumed to be constant as a share of GDP, so in contrast to the outcome under the extended-baseline scenario, the changes CBO has made in its estate-tax modeling do not affect its projections of revenues.)
Even in 2007, CBO projected that federal debt would quickly accelerate to unsustainable levels under the alternative fiscal scenario, reaching 100 percent of GDP in 2030. Because of the greater short-term accumulation of debt and higher projected spending that CBO now foresees, debt under this scenario is estimated to reach 100 percent of GDP in 2023 (see Figure B-4).
Federal Debt Held by the Public Under CBO’s Alternative Fiscal Scenario
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Note: The alternative fiscal scenario deviates from CBO’s baseline projections by incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past.
Changes in Projections of Health Care Spending
The methods that CBO used to project total health care spending for this analysis are consistent with those it used in 2007.3 The growth in health care spending that CBO now estimates for the long term is similar to what it projected in 2007, but total health care spending is estimated to account for a slightly larger share of GDP in the first decades of the projection period and a slightly smaller share in later decades.
The projections of other (that is, non-Medicare, non-Medicaid) health care spending presented in this report and in the 2007 outlook rely, in part, on the historical rate of growth in spending for other health care. CBO assumed for its 2007 projections that the average rate of excess cost growth would equal the historical average for the 1975–2005 period—2.0 percentage points. However, excess cost growth was lower in the two additional years of data now available from the national health expenditure accounts, and CBO has thus based its current projections in part on the 1.8-percentage-point average for the years 1975 to 2007 (see Table 2-3). CBO assumed that the rate of excess cost growth for other health care spending at the end of the 75-year projection period would be the same as it was for that year in the 2007 projections. That assumption, combined with the lower rate of excess cost growth at the beginning of the period, led to an overall average rate of excess cost growth equal to 0.5 percentage points in CBO’s current projections for other health care spending; in the 2007 analysis, that rate was 0.6 percentage points. As a result, other health care spending grows more slowly in CBO’s current outlook than was previously projected.
Total health care spending under the extended-baseline scenario is now projected to be slightly higher as a percentage of GDP through 2046 than CBO projected in 2007 and slightly lower in the years thereafter. The increase through 2046 is driven by a rise in spending for Medicare as a percentage of GDP relative to CBO’s previous long-term projections. (That increase occurs because CBO’s estimate of spending for Medicare has declined by less than its estimate of the size of the overall economy.) Therefore, such spending accounts for a larger share of GDP than it did in CBO’s 2007 projections. The smaller share in the years after 2046 results from assumptions about a slower rate of excess cost growth for Medicare, Medicaid, and other health care spending (see Figure B-5).
Total Spending for Health Care Under CBO’s Extended-Baseline Scenario
(Percentage of gross domestic product)
Source: Congressional Budget Office.
Note: Total spending for health care comprises spending for health services and supplies as defined in the national health expenditure accounts maintained by the Centers for Medicare and Medicaid Services. Amounts for Medicare include beneficiaries’ premiums and amounts paid by the states representing part of their share of the savings from shifting some Medicaid spending for prescription drugs to Part D of Medicare. Amounts for Medicaid include spending by the states.
The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections and then extending the baseline concept for the rest of the projection period.
The differences between CBO’s current projections of total health care spending under the alternative fiscal scenario and those made in 2007 under that scenario are similar to the differences under the extended-baseline scenario.
See Congressional Budget Office, The Long-Term Budget Outlook (December 2007).
See Congressional Budget Office, “Changes in CBO’s Long-Term Social Security Projections Since December 2007,” Appendix A in Updated Long-Term Projections for Social Security (August 2008), pp. 31–32.
Total spending for health care comprises spending for health services and supplies as defined in the national health expenditure accounts maintained by the Centers for Medicare and Medicaid Services.
