Revenues and Spending Under CBO's Extended Baseline Scenario and Two Alternatives Specified by Chairman Ryan

Report
March 23, 2012

The explosive path of federal debt that the Congressional Budget Office (CBO) projects under what many observers would view as current policies underscores the need for policy changes to put the nation on a sustainable course.

The aging of the population and rising costs for health care will push spending for Social Security, Medicare, Medicaid, and other federal health care programs considerably higher as a percentage of gross domestic product (GDP). If that rising level of spending is coupled with revenues that are held close to the average share of GDP that they have represented for the past 40 years, the resulting budget deficits will increase federal debt to unsupportable levels. To prevent that outcome, policymakers will need to increase revenues substantially relative to GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches.

Allowing changes that are scheduled under current law to take effect—including the expiration of tax cuts that originally went into effect in 2001 and 2003—is one of many possible approaches for preventing deficits from growing in an unsustainable way. Under that approach, which is the assumption about future policy that underlies CBO’s baseline projections, federal revenues would increase sharply, and federal spending would be restrained somewhat relative to what would occur under current policies; both the revenues and spending of the federal government would be well above their historical averages as a share of GDP.

Congressman Paul Ryan asked CBO to examine two other approaches: an across-the-board increase in income tax rates and an across-the-board reduction in spending other than that for health care entitlement programs. The former approach would require revenue increases even greater than those in CBO’s current-law baseline, and the latter would require very sharp cuts in other federal programs.