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CBO: Long-term deficit depends on congressional decisions

The Congressional Budget Office released the latest version of the long-term budget outlook today. It's an interesting document, because it requires the CBO to do some fancy footwork. In theory, CBO's deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades. See for yourself:

extendedbaseline.jpg

But current law is not likely to advance unmolested. You'll notice, for instance, that there's a big jump in current-law revenues next year. That's because the Bush tax cuts are slated to expire totally. But few expect Congress to allow them to expire totally. They're likely to preserve the bulk of the cuts, rejecting only some of the cuts that helped out the rich.

So the Congressional Budget Office also publishes an alternative scenario. In this world, we fix the Medicare doctor payment system so that our budget forecasts show how much we're actually paying doctors (the one-year increases in pay we've been doing lately leave the long-term forecasts artificially low), the cost-control elements of the Affordable Care Act aren't implemented, and, well, I'll let CBO explain the big gun: "More important, CBO assumed for this scenario that most of the provisions of the 2001 and 2003 tax cuts would be extended, that the reach of the alternative minimum tax would be kept close to its historical extent, and that over the longer run, tax law would evolve further so that revenues would remain at about 19 percent of GDP." Here's what that looks like:

altfiscal.jpg

It sounds silly to say this, but policy decisions matter. We could put down a carbon tax, or a financial-transactions tax, or cut defense spending by a trillion dollars, and that would improve the outlook even more. We could refuse to implement the elements of current law that reduce the deficit and that would make the deficit outlook much worse.

There was a lot of talk during health-care reform that there was simply no way Congress would allow the excise tax to go into effect. At the time, I termed that deficit nihilism, and this graph is a good illustration of why: Either Congress can pass and implement policies that will bring the long-term deficit under control or it can't. Those are the only two choices here. But there's no real mechanism for getting the deficit under control aside from Congress passing laws and then sticking to them.

By Ezra Klein  |  June 30, 2010; 9:45 AM ET
Categories:  Budget  
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Comments

Are historical versions of similar graphs available anywhere? Granted, the CBO hasn't existed forever, but Treasury might have something. I'd be curious to the an extended baseline scenario from the mid-1960s -- in particular, a projection of Medicaid and Welfare costs from the beginning of those programs.

It does seem all too easy to get bogged down in programs that obviously have cost which will rise uncontrollably. Knowing this, we sill do it and doing it tends to affects others down the road rather than ourselves. Short of a balanced budget amendment (which I consider a dubious idea -- there are actually times when a loan might be needed), how can we in the here-and-now assure fiscal responsibility? Is there some Constitutional language that could be added to require (for example) that at least one year in every five debt must drop to zero and a surplus must be cached for a rainy day?

Posted by: rmgregory | June 30, 2010 10:21 AM | Report abuse

It is obvious from the graph that Social Security is not the problem it is health care spending.

Actually if you look at total federal health care spending not just Medicare and Medicaid but also Military Health, Veterans Health, Federal Employees Health, Indian Health, Community Health Centers, Federal Prison Health ... you will find that if you subtract total health spending from total non-interest spending (even including Social Security) the rest of the budget will actually decline as a percentage of GDP!

Posted by: cautious | June 30, 2010 10:46 AM | Report abuse

Thanks - v.interesting.

Posted by: mariewilson11 | June 30, 2010 12:09 PM | Report abuse

This is cash-basis accounting. What's it look like on an accrual basis? Much much worse because of all the government's unfunded liabilities.

Also if the government forces one to purchase health insurance at one's own expense that's effectively a tax. These off-balance sheet revenues and expenses should be included in the analysis.

Finally, we should also look at the regulatory burden - the cost of complying with the government regulations which have been growing like kudzu.

Posted by: tbass1 | June 30, 2010 1:51 PM | Report abuse

"But there's no real mechanism for getting the deficit under control aside from Congress passing laws and then sticking to them."

Not true! The traditional American way to balance the budget is to pray for technological shocks to the economy which produce unexpected booms in growth and productivity.

Posted by: zosima | June 30, 2010 10:19 PM | Report abuse

"Also if the government forces one to purchase health insurance at one's own expense that's effectively a tax. These off-balance sheet revenues and expenses ..."

Whoops -- you can, through some analogy call the requirement to purchase health insurance a "tax", but you cannot call it a source of (government) revenue.

OK, here's an idea for lowering the overall tax burden: Ban states from making car insurance mandatory!

OK, you can call mandated health, or car insurance a tax, and by the same reasoning, a (usually local government) requirement that you keep the sidewalk in front of your business ice free in winter is also a tax. Also, one way streets are a tax because under some circumstances, you could arrive at your destination faster and cheaper by going the "wrong way" (such authoritarian language!) up a one way street.

But, getting back to the ice on the sidewalks, it's a government imposed burden that will cost you money if you hire someone to do it. But then again, it might save you from a big lawsuit. Or the requirement that somebody else keep their sidewalk ice free might save you from a broken neck.

Health care can be expected to have some analogous effects. Is it fantastic that someone else's health could have a negative effect on you? not really. How about the part time school bus driver with no benefits who has a heart attack on his/her route that cholesterol lowering drugs might have prevented? How about the unpaid visits to the emergency room that hospitals no longer have to pass on to whoever they can find to subsidize them, when people stop using the ER in place of a family doctor. How about if the government, now able to show a financial benefit, requires procedures in hospitals that drastically cut MERSA and similar hospital spread infections (for which Medicare might pay hundreds of dollars a day for 3, 6, or 9 months (it's happenning in my own family). The cost/benefit effect alone could make it happen. And then along will come the "fringe benefits", like my father not being a deaths door for a time, and stuck in a chair or walker for months and months.

Lets just say there might be a reason the other wealth countries, with real health care systems, have half the financial burden of health care that we do, and mostly people better satisfied with the care they get.

"the cost of complying with the government regulations which have been growing like kudzu." Oh yes, the cost of complying with those pesky safety procedures for mines and oil rigs. The high cost of requiring Wall Street to sell financial instruments that people can understand. Terrible, terrible.

http://eisenhowersocialist.blogspot.com/

Posted by: HalMorris | July 1, 2010 10:06 AM | Report abuse

We balanced the budget in 2001. What changed?

1) We raised defense spending from $300 billion to $700 billion, including DOD and the wars. This added $2.7 trillion to the debt thus far.

2) Bush cut taxes by $200-$300 billion per year per CBO. This added $1.3 trillion to the debt thus far.

3) This $4 trillion added to the debt at 3% interest represents $120 billion per year in additional interest costs.

$450 Defense
$250 Tax cuts
$120 Interest
-------------
$820 billion in annual deficit increase due to Bush policies.

We can reverse the Bush tax cuts and defense spending, putting us back on a firmer short-term track. However, the long-term entitlement issues (five parts Medicare and one part Social Security) require thoughtful reforms. Further, with 20% under-employment there is no feasible path to a sustainable budget without massive social disruption.

To get out of this crisis, we need to do what Stiglitz, Roubini, Sachs, Taleb and Ferguson have argued: Write down mortgage debt say 30%, giving the banks an equity interest and offsetting this hit with bank bondholder haircuts.

Posted by: Factified | July 1, 2010 5:04 PM | Report abuse

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