March 13, 2012
As it usually does in March, CBO has updated the baseline budget projections that it released in January. The new baseline projections incorporate the budgetary effects of recently enacted legislation and updated technical assumptions based on new information (such as data about spending and revenues so far this year and program details released in conjunction with the President’s budget). CBO has not revised its outlook for the economy since January.
The fundamental story about the federal budget has not changed: Although the deficit is starting to shrink, it remains very large by historical standards. How much and how quickly it declines will depend in part on how well the economy performs over the next few years. Probably more critical, though, will be the fiscal policy choices made by lawmakers as they face the substantial changes to tax and spending policies that are slated to take effect within the next year under current law.
What Are CBO’s Updated Baseline Projections?
As I’ve noted in previous blog posts, CBO’s baseline projections are not a forecast of future events; rather, they are intended to provide a benchmark against which potential legislation can be measured. Therefore, as specified in law, those projections generally incorporate the assumption that current laws are implemented.
On that basis, CBO’s updated baseline projections are as follows:
- Deficit in 2012: The federal budget is projected to show a deficit of nearly $1.2 trillion in 2012. Relative to the nation’s gross domestic product (GDP), that shortfall will equal 7.6 percent—about 1 percentage point less than the deficit recorded last year but still higher than any deficit between 1946 and 2008.
- Deficits over the 2013-2022 period: Under current law, deficits are projected to drop markedly in the next few years and to average 1.4 percent of GDP over the 2013–2022 period. Much of that projected decline occurs because, under current law, revenues will rise considerably as a share of GDP—from 15.8 percent in 2012 to 19.8 percent in 2014 and 21.2 percent in 2022.
- Federal Debt: With deficits small relative to the size of the economy, the amount of federal debt held by the public would drop from nearly 76 percent of GDP in 2013 to 61 percent in 2022—still higher than in any year between 1953 and 2009.
How Have CBO’s Baseline Projections Changed Since January 2012?
At $1.2 trillion, CBO’s current estimate of the budget deficit for fiscal year 2012 is $93 billion larger than the deficit projected in January. The changes since January in the outlook for 2012 stem almost entirely from the enactment of legislation, particularly the Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96). Among other things, that law extended the 2 percentage-point cut in the payroll tax rate for Social Security, continued emergency unemployment benefits, and temporarily delayed a scheduled reduction in Medicare’s payment rates for physicians.
In contrast, the changes in the projections for the 2013–2022 period result mainly from technical estimating revisions. Projected deficits in the baseline total $2.9 trillion over that 10-year period, $186 billion less than the amount projected in January—a decrease equal to about 0.1 percent of GDP over that period. Updated estimates of the effects of the Affordable Care Act’s insurance coverage provisions account for the largest share of those revisions. For more details about those estimates, see CBO’s Updated Estimates of the Insurance Coverage Provisions of the Affordable Care Act released today.
What Would the Budget Outlook Be If Certain Current Tax and Spending Policies Were Continued?
Substantial changes to tax and spending policies are slated to take effect within the next year under current law. As a result, CBO’s baseline projections show much higher revenues and lower outlays than would occur if the lower tax rates that are now in effect were extended and if provisions that limit future spending were eased. So CBO has also prepared projections under an “alternative fiscal scenario,” which reflects the assumption that many current tax and spending policies that have recently been in effect remain in place, even though, under current law, they are scheduled to change. That scenario incorporates the following assumptions:
- Expiring tax provisions (other than the current reduction in the payroll tax rate for Social Security) are extended;
- The alternative minimum tax is indexed for inflation after 2011;
- Medicare’s payment rates for physicians’ services are held constant at their current level (rather than dropping by an estimated 27 percent in January 2013 and more thereafter, as scheduled under current law); and
- The automatic spending reductions required by the Budget Control Act, which are set to take effect in January 2013, do not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place).
Under that alternative fiscal scenario, deficits over the 2013–2022 period would be much higher, totaling $10.7 trillion. Measured as a share of the economy, deficits would average 5.3 percent of GDP rather than the 1.4 percent reflected in CBO’s baseline projections. Instead of declining to 61 percent of GDP, debt held by the public would climb to 93 percent in 2022, the highest percentage since just after World War II.