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CRFBs Long-Term Realistic Baseline

CRFBs Long-Term Realistic Baseline

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Published by: Committee For a Responsible Federal Budget on Jun 12, 2012
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10/15/2013

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1899 L Street NW Suite 400 • Washington, DC 20036 • Phone: 202-986-2700 Fax: 202-986-3696 •www.crfb.org 
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CRFB’s Long-Term Realistic BaselineJune 12, 2012
In light of the most recent long-term budget projections from theCongressional Budget Office (CBO), the Committee for a Responsible FederalBudget (CRFB) has updated its long-term “Realistic Baseline.”
1
 CBO’s projections show two vastly different scenarios for how the budgetcould play out over the next 75 years. Under its Extended Baseline Scenario,the “fiscal cliff” of scheduled changes for the end of the year is allowed to gooff, meaning many temporary tax and spending policies expire and theautomatic sequester takes effect. This scenario would put debt on adownward path, but is extremely unlikely to happen. Under CBO’s morerealistic Alternative Fiscal Scenario, debt explodes as a result of lawmakersextending temporary tax and spending policies and turning off the sequester.Under that scenario, debt would rise from 73 percent of GDP in 2012 to 93percent by 2022, almost 200 percent by 2037, and more than 900 percent ofGDP by the end of the 75-year projection, according to our extrapolation oftheir projections.While the Alternative Fiscal Scenario is in many ways more realistic than theExtended Baseline, the CRFB Realistic Baseline incorporates what we believeare a more realistic combination of policy assumptions. These assumptionsresult in a debt path that is somewhere between CBO’s two scenarios. Underthe CRFB Realistic Baseline, debt rises to 85 percent of GDP by 2022, 134percent by 2037, and 428 percent by 2087, the end of the 75-year budgetwindow.
Fig. 1: Debt under the CRFB Realistic Baseline (Percent of GDP)
 
 
-200%0%200%400%600%800%1000%2012 2027 2042 2057 2072 2087Extended Baseline CRFB Realistic Alternative Fiscal Scenario
 
 
Committee for a Responsible Federal Budget 
2
CRFB Realistic Baseline Assumptions
In our Realistic Baseline, we make a set of “current policy” assumptions that we feel are morelikely to occur than those underlying current law projections. These include the extension of the2001/2003 tax cuts, the continued enactment of patches to the Alternative Minimum Tax toprevent it from hitting middle-class taxpayers, the averting of a 27 percent cut in Medicarephysician payments (the “doc fix”), the repeal of the automatic sequester, and the drawdown ofthe war in Afghanistan.
1
 
Fig. 2: Assumptions Made in CBO Scenarios and the CRFB Realistic Baseline
 
Budget Area Extended BaselineAlternative FiscalScenarioCRFB RealisticAssumptions hrough 2022Revenue
All temporary taxprovisions expire asscheduledAll temporary provisionsare extended2001/2003 tax cuts andAMT patches areextended; tax extendersexpire as scheduled
Discretionary
Spending levels are asspecified by the BudgetControl Act caps,including the sequesterSpending levels are asspecified by the BudgetControl Act caps,excluding the sequesterSpending levels are asspecified by the BudgetControl Act caps,excluding the sequester
Health Care
27% cut in physicianpayments as scheduled;sequester takes effectPermanent freeze toMedicare physicianpayments; sequester isrepealedPermanent freeze toMedicare physicianpayments; sequester isrepealed
OtherMandatory
Grows as scheduled;sequester takes effectGenerally grows asscheduled; sequester isrepealedGenerally grows asscheduled; sequester isrepealed
War Spending
Grows with inflation Grows with inflation Spending is drawn down
Assumptions After 2022Revenue
Grows as scheduledunder current lawFrozen as a share ofGDP at 2022 levelsGrows assumingcontinuation of thecurrent tax code
Discretionary
Frozen as a share ofGDP at 2022 levels,including sequesterIncreased to historicalaverage as a share ofGDP by 2027; frozenthereafterFrozen as a share ofGDP at 2022 levels,excluding sequester
Health Care
ACA cost controls fullyeffective through 2029ACA cost controlsdiscontinued after 2022ACA cost controlspartially continuedthrough 2029
OtherMandatory
Generally frozen as ashare of GDP at 2022levels*Increased to historicalaverage as a share ofGDP by 2027; frozenthereafterFrozen as a share ofGDP at 2022 levels
1
For information and projections for CRFB’s Realistic Baseline through 2022, seehttp://crfb.org/crfbs-realistic-baseline.
 
 
Committee for a Responsible Federal Budget 
3
The assumptions behind the CRFB Realistic Baseline are closer to CBO’s Alternative FiscalScenario than the Extended Baseline, but they differ in a few ways:
 
We allow certain inflation-indexed features of the tax code to naturally push up revenueas a percent of GDP due to incomes rising faster than prices (“real bracket creep”) andthe growing reach of the health insurance excise tax. The Alternative Fiscal Scenariofreezes revenue at its 2022 level as a percent of GDP over the long-term – accounting forthe largest difference in debt over the long-term between the two projections.
 
We assume that spending on the war in Afghanistan is drawn down, while theAlternative Fiscal Scenario assumes that it grows with inflation.
 
We do not assume that the temporary “tax extenders” are extended, whereas theAlternative Fiscal Scenario does.
 
We assume that the cost controls in the Affordable Care Act are partially successful from2022 through 2029, while the Alternative Fiscal Scenario assumes that they are either notsuccessful or repealed past 2022.
 
We assume that non-health and non-retirement spending (“other mandatory”) is heldconstant as a percent of GDP after 2022, while the Alternative Fiscal Scenario increasesthat spending after 2022 to its historical average as a share of the economy and holds itconstant at that level.
Budget Projections under the CRFB Realistic Baseline
Over the next 25 years, the CRFB Realistic Baseline projections are quite similar to theAlternative Fiscal Scenario, but begin to diverge over the long-term once both sets of projectionshave already reached unsustainable levels. Although the debt under the CRFB Realistic Baselinedoes not rise quite as exponentially as it does under the Alternative Fiscal Scenario, both pathswould clearly bring disastrous outcomes. Growing deficits and debt would become anenormous burden on the economy, and a fiscal crisis would undoubtedly occur at some point.Spending is projected to rise rapidly from 23.4 percent of GDP in 2012 to 29.9 percent in 2037,and 50.4 percent by 2087. A major driver of this spending is simply due to growing interest paidon an expanding amount of debt. Interest spending would rise from 1.4 percent in 2012 to 6.5percent by 2037 and 20.9 percent by 2087. In terms of non-interest spending, health care is thelargest driver, rising from 4.8 percent in 2012 to 9.1 percent in 2037 and 14.6 percent in 2087.Revenues would rise throughout the projection window, but not nearly enough to keep up withspending. Revenues would rise from a recession-induced level of 15.8 percent of GDP in 2012 to20.1 percent by 2037 and 25.1 percent by 2087. Still, deficits would persist and grow rapidly overthe long term. Although deficits would fall from 7.6 percent of GDP in 2012 to a low of 3.7percent in 2018, they would soon reverse course, rising to 9.8 percent by 2037 and an eye-popping 25.3 percent by 2087.

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