Each year, after the President releases his annual budget request in February, CBO analyzes the budget proposals and, using its own estimating procedures and economic assumptions, projects what the federal budget would look like over the next 10 years if those proposals were adopted. CBO usually provides those results in two parts.
The first part—an analysis of the proposals’ budgetary impact without considering their effects on the economy—was released today. The second part—an analysis showing the proposals’ potential effects on the economy and, in turn, the impact of those economic effects on the budget—will be released in a few weeks.
Earlier this week, CBO released its updated baseline budget projections. Unlike its estimates of the President’s budget, CBO’s baseline projections largely reflect the assumption that current tax and spending laws will remain unchanged, so as to provide a benchmark against which potential legislation can be measured. Under that assumption, CBO estimates that the deficit would total $1.2 trillion in 2012 and that cumulative deficits over the 2013–2022 period would amount to $2.9 trillion.
What Would Be the Effects on the Federal Budget of Enacting the President’s Proposals?
Most of the net budgetary impact would come from changes in tax policies, but changes in spending policies would also play a role. CBO, incorporating estimates by the staff of the Joint Committee on Taxation (JCT) for the President’s tax proposals estimates that enactment of the President’s proposals would have the following consequences for the budget:
- The deficit in 2012 would equal $1.3 trillion (or 8.1 percent of gross domestic product), $82 billion more than the 2012 deficit projected in CBO’s baseline.
- In 2013, the deficit would decline to $977 billion (or 6.1 percent of GDP), $365 billion more than the shortfall projected for 2013 in CBO’s baseline.
- The deficit would decline further relative to GDP in subsequent years, reaching 2.5 percent by 2017, but then would increase again, reaching 3.0 percent of GDP in 2022. The deficits after 2013 would exceed those in CBO’s baseline by between 1.4 percent and 1.9 percent of GDP each year.
- In all, deficits would total $6.4 trillion between 2013 and 2022 (or 3.2 percent of total GDP projected for that period). That amount is $3.5 trillion more than the cumulative deficit in CBO’s baseline: The policy changes would, on net, add about $2.9 trillion to projected deficits and necessitate $0.6 trillion in additional interest payments (because of increased federal borrowing).
- Federal debt held by the public would increase from $10.1 trillion (68 percent of GDP) at the end of 2011 to $15.2 trillion (77 percent of GDP) at the end of 2017 and then to $18.8 trillion (76 percent of GDP) at the end of 2022.
To provide another benchmark against which budgetary proposals can be measured—largely reflecting current policies rather than current law—CBO has also developed an alternative fiscal scenario. That scenario incorporates the assumption that most tax provisions that have recently expired or are set to expire are extended, as well as several other assumptions about tax and spending policy that differ from those in current law. (See my post from Tuesday for a description of the assumptions underlying that scenario.) Under that scenario, budget deficits would total $10.7 trillion over the 2013-2022 period, and debt held by the public would rise to $23.0 trillion by 2022. Deficits and debt under the President’s budget, though significantly larger than in CBO’s baseline, would be significantly smaller than the amounts projected in the alternative fiscal scenario.
What Proposals Would Have the Largest Impact on Increasing Projected Deficits?
The President proposes to extend certain tax provisions that are slated to expire or that have already expired. The 2010 tax act (officially the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Public Law 111-312) extended through December 2012 many of the income tax reductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. The President proposes to make those reductions permanent—except, in some cases, for higher-income taxpayers.
In addition, the President seeks to reduce the number of taxpayers who would be subject to the alternative minimum tax by permanently setting various parameters of that tax at the amounts that were in effect in calendar year 2011 and indexing those amounts for inflation in later years. The President also proposes, starting in January 2013, to permanently restore the rates and exemption levels for estate and gift taxes that were in effect in calendar year 2009.
Together, those policies would reduce tax revenues and boost outlays for refundable tax credits by a total of about $3.5 trillion over the 2013–2022 period relative to the amounts projected in CBO’s baseline.
Automatic procedures specified by last year’s Budget Control Act (Public Law 112-25) are set to go into effect in January 2013 and reduce spending in subsequent years. The President’s budget does not include those reductions, thereby boosting outlays relative to the current-law baseline by $1.0 trillion over the next 10 years.
What Policies Would Have the Largest Impact on Reducing Projected Deficits?
The President is also proposing some policies that would reduce projected deficits relative to CBO’s baseline. For example, the President’s budget envisions funding for military operations in Afghanistan and for related activities (also known as overseas contingency operations, or OCO) that is less than the amounts in CBO’s baseline. As specified in law, the baseline incorporates the assumption that funding for such activities will total $127 billion (the amount provided in 2012) each year through 2022, with increases to keep pace with inflation; the President’s budget, by comparison, includes a request for $97 billion for OCO in 2013 and $44 billion in each year thereafter through 2022. The cumulative difference in outlays between CBO’s baseline and the President’s proposal is $0.8 trillion over the 2013–2022 period.
The President would also cap the rate at which certain deductions and exclusions reduce a taxpayer’s income tax liability at 28 percent; that change would decrease deficits by a total of $0.5 trillion over the next decade.
How Do CBO’s Estimates Compare with Those in the President’s Budget?
CBO’s estimates of deficits under the President’s budget are generally smaller than those of the Administration—by $74 billion (or 6 percent) for 2012 and by a total of $294 billion (or 4 percent) for the following 10 years. CBO projects $1.5 trillion (or 3 percent) less in outlays under the President’s budget than the Administration does, because of differences both in economic assumptions and in modeling and other technical assumptions. CBO’s estimates of revenues under the President’s budget are also lower than the Administration’s—by $1.2 trillion (or 3 percent)—primarily because of differing economic assumptions (particularly about wages and salaries).