Croker Sack

"Democracy is the theory that the common people know what they want, and deserve to get it good and hard." — Henry Louis Mencken (1880-1956)

Friday, January 28, 2011

CBO Assumptions Tell Us More Than CBO Deficit Projections

Congressional Budget Office budget projections for anything other than the current fiscal year seem almost worthless, since they are based on current laws rather than likely future circumstances.

To illustrate, look at the January 2010 budget projections.

The deficit for fiscal year 2010 was projected to be $1.3 trillion—pretty close to the actual figure for that year.

As shown in the interactive graph at the beginning of the January 2010 report, the federal budget deficit for fiscal year 2011 was projected to be $980 billion.

Now turn to the January 2011 projection, which projects a federal budget deficit of $1.5 trillion for fiscal year 2011.

What a difference a year makes, huh?

The difference largely results from the requirement that the CBO assume current law stays in effect during the future fiscal year, but the law doesn’t.

Here’s part of the explanation in the most recent CBO report:

CBO's baseline projections are not intended to be a forecast of future budgetary outcomes; rather, they serve as a neutral benchmark that legislators and others can use to assess the potential effects of policy decisions. Consequently, they incorporate the assumption that current laws governing taxes and spending will remain unchanged. In particular, the baseline projections in this report are based on the following assumptions:
---Sharp reductions in Medicare's payment rates for physicians' services take effect as scheduled at the end of 2011;
---Extensions of unemployment compensation, the one-year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;
---Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire as scheduled at the end of 2012; and
---Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.

The projected deficits over the latter part of the coming decade are much smaller relative to GDP than is the current deficit, mostly because, under those assumptions and with a continuing economic expansion, revenues as a share of GDP are projected to rise steadily—from about 15 percent of GDP in 2011 to 21 percent by 2021.

The assumptions illustrate what hard choices are ahead. That makes them more useful than the projected deficit figures based on them.


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