Tomorrow the Congressional Budget Office will release its semi-annual Budget and Economic Outlook. The report will provide the economic and budget projections that will be the basis of the contentious budget debate that will take place over the next few months. What may be surprising to some is that it will very likely present estimates of a federal budget that--at least for the next decade--is not spinning out of control.
Since Simpson and Bowles published their report in December 2010 the medium-term budget outlook has improved considerably, as shown by recent studies from the Center on Budget and Policy Priorities and the Committee for a Responsible Federal Budget. A combination of factors are responsible. The Budget Control Act of 2011 raised approximately $1.7 trillion (mostly by cutting defense and non-defense discretionary spending) over the 10-year budget window. The just-enacted American Taxpayer Relief Act added another $650 billion. In addition, since 2010 the CBO has revised its economic forecasts upward. This reduces deficits over 10 years by another $1.5 trillion.
Taking all this into account the experts at CBPP and CFRB estimate that Congress must enact $1.4 trillion more deficit reduction. That would leave the debt-to-GDP ratio a decade from now equal to its current level of approximately 73 percent. (Keeping the debt-to-GDP level from growth achieves what economists call "sustainability.") These estimates did not take into account the additional $1.2 trillion of automatic budget cuts that will result from sequestration, scheduled to begin taking effect on March 1.
Contrary to the conventional wisdom of just a few weeks ago, many budget leaders are now saying sequestration will happen. If Congress allows this to happen, it would put us within spitting distance of sustainability over the 10-year budget window! From a purely budgetary perspective this would be a considerable achievement.
But by no means are we are out of the woods yet. Here are just a few reasons not to put your deficit worries to bed:
- The estimates do not take into account the phalanx of expiring tax provisions that Congress will most likely want to begin extending again at the end of 2013 (add about $450 billion).
- CBO will revise its economic forecasts in tomorrow's report. This could easily move the 10-year deficit figures by hundreds of billions of dollars in either direction.
- Even if the debt-to-GDP ratio can be stabilized at 73 percent (which it will not be, see next point) that level is still double the average of the three decades before the recession.
- The long-term deficit projections (that is, those beyond the next decade) will still be horrendous, mostly because of rising health care costs and an aging population.