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No-BS Long-Term Budget Baseline (Jan. 2004) Under realistic assumptions, the federal deficit will remain at roughly 4 percent of GDP through 2010, before worsening as the baby boom generation begins to retire. The cumulative deficit within the budget period 2005-2014 is now $6.4 trillion. The public debt will rise from $4.4 trillion in 2004 to just under $11 trillion in 2015. Centrists.Org's new baseline is mostly unchanged from the previous projections, which were issued in August 2003. The previous baseline accurately predicted spending patterns, including rapid growth of discretionary (non-entitlement) spending and the enactment of a Medicare drug benefit. However, there is a faint glimmer of hope that spending trends might moderate in coming years. At long last, some conservative think tanks and members of Congress are starting to talk about budget cuts and deficit reduction. This is a big change. Before, fiscally conservative Republicans had shied away from confrontation with the more radical anti-tax groups -- like the Club for Growth and Americans for Tax Reform -- which preach that deficits are meaningless (and imply that the mission of conservatives is to simultaneously cut taxes and raise spending). The big question for the Centrists.Org No-BS baseline is: Will this bit of talk carry over into actual spending restraints in coming years, especially for non-defense discretionary outlays? This baseline assumes that the answer is "No," and that discretionary spending continues to grow at the same rate as GDP (the assumption we used all last year, which actually undershot spending trends a little). We just aren't yet convinced that Congress is serious. We also do not believe that a large reduction in overseas military forces is imminent, or that the "natural" rate of growth of defense spending -- the amount needed to keep a constant force up to date -- will fall toward the rates assumed by Congress and CBO. However, we will adjust the baseline in coming months if it looks like defense needs are truly moderating, and federal budget cuts and deficit reduction efforts are more probable. Centrists.Org, No-BS Budget Baseline Tables: #3. The interaction between items #1 and #2 is included Figure 1. Adjustments to CBO's Statutory Baseline, in Billions of Dollars (Estimates Include the Cost of Additional Debt Service)
Source: Centrists.Org Notes: All estimated adjustments based on Table 1-3 of Congressional Budget Office The Budget and Economic Outlook, Fiscal Years 2005 to 2014 (January 2004). Interaction effect based on footnote c, with year-by-year detail provided by CBO staff. With the adjustments, the deficit grows to $6.4 trillion over 10 years, roughly $4.5 trillion higher than CBO's statutory baseline deficit of $1.9 trillion (see Figure 2). The annual deficit would hover around 4 percent of GDP through 2010, before rising toward 5 percent of GDP by 2013, the last year of CBO's projections. The public debt would grow from $4.4 trillion in 2004 (38 percent of GDP) to $11 trillion (60 percent of GDP) by 2014. Figure 2. Budget Deficit (-) or Surplus (+), With Adjustments (In Billions of Dollars)
Source: Centrists.Org Notes: All estimated adjustments based on Table 1-3 of Congressional Budget Office The Budget and Economic Outlook, Fiscal Years 2005 to 2014 (January 2004). Interaction effect based on footnote c, with year-by-year detail provided by CBO staff. Because CBO now provides adjustments to the statutory baseline that allow analysts to include a more politically realistic revenue and spending trajectory, Centrists.Org simply used the (adjusted) CBO estimates in its baseline through 2014. Specifically, the Centrists.Org baseline now equals the CBO baseline, plus CBO's estimate of the revenue and debt service costs of extending expiring tax cuts and CBO's estimate of holding the growth of discretionary (non-entitlement) spending at the same rate of growth as nominal GDP. The revenue adjustments include an extension of the fixes to the Alternative Minimum Tax (AMT) and the interaction between that extension and the extension of the rest of the expiring tax cuts, using unpublished year-by-year data obtained from CBO. After 2014, the CBO numbers are carried forward to 2030 using standard economic and demographic assumptions. On this trajectory, the budget essentially disintegrates after 2015, with deficits rising from 5.5 percent of GDP in 2015 to 15 percent by 2030. The public debt grows from 63 percent of GDP in 2015 to over 150 percent of GDP by 2030. Of course, it is possible that Congress will let tax cuts lapse, will dramatically slow the growth of discretionary spending, or will take other actions designed to reduce the projected deficits, such as reducing entitlement costs. Nevertheless, Centrists.Org projects that such deficit reduction measures are not likely based on the current legislative outlook. There is one ray of hope, however. In the last two months, some conservative members of Congress have returned to their balanced budget roots, and -- with the encouragement of think tanks like the Heritage Foundation -- are starting to at least talk about spending cuts and deficit reduction. Centrists.Org will monitor the budget situation carefully, and if legislators appear to actually be considering slowing the growth of spending, a downward adjustment to non-defense discretionary spending might be needed. Nevertheless, the assumption that discretionary spending grows at the same rate as GDP seems appropriate for now. (That assumption has actually proven to be too low for the last several years.) Long-term projections are not intended to be forecasts of what is likely to occur. Instead they are intended to be realistic, plausible projections of the trajectory that current spending and revenue patterns imply for the budget. Congress will certainly be forced to change that trajectory by slowing the growth of spending and raising tax revenues after 2010, when the large baby boom generation retires and joins the entitlement rolls, and would otherwise place the budget under an untenable strain. Centrists.Org, No-BS Budget Baseline Tables: Table 1. Federal Budget in Billions of Dollars, 2000-2030 Table 2. Federal Budget as a Percent of GDP, 2000-2030 Table 3. Summary Table, 2000-2030 in 10-Year Intervals Links: Centrists.Org CBO: Faster Real GDP Growth, Lower Revenues, Higher Deficits and Interest Costs Ahead (preliminary January 26, 2004) |
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