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Tempting Fate: The Federal Budget Outlook

Alan J. Auerbach, William G. Gale

Published: June 30, 2011
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Abstract

We present new estimates of the budget outlook, based on the latest projections from the Congressional Budget Office and the Medicare and Social Security Trustee reports. The medium-term and long-term budget outlook have not changed appreciably since last year. Under reasonable assumptions, the federal government is likely to face deficits in excess of 6 percent of GDP by late in the decade, even with a strong economy, with the debt-GDP ratio reaching 87.4 percent by 2021. The long-term budget outlook is sensitive to assumptions about how health care spending will respond to recent legislation. Excerpt of abstract.

The text below is an excerpt from the complete document. Read the entire report in PDF format.


I. Introduction

The United States faces the prospect of large federal fiscal deficits in the immediate future, the next 10 years, and the longer term. The short-term deficits — the result of the tax cuts and spending increases of the last decade, the "Great Recession," and economic policy adjustments in the past year — are generally thought to be helping the economic recovery. In contrast, the medium-term deficits projected for the next 10 years and the long-term deficits projected beyond 2021 are a source of concern. Even if they do not lead immediately to a crisis, they will nevertheless create growing and serious burdens on the economy.

The unsustainability of federal fiscal policy has been discussed at least since the 1980s. But the problem has increased in importance and urgency in recent years, for several reasons. First, the medium-term projections have deteriorated significantly. Second, the issues driving the long-term projections — in particular, the retirement of the baby boomers and the aging of the population and the resulting pressure on Medicare and to some extent Social Security — which were several decades away in the 1980s — are now imminent. Third, there are increasing questions about the rest of the world's appetite for U.S. debt, as the United States has changed from a net creditor country in 1980 to a vast net debtor currently. Fourth, many countries around the world and many of the U.S. states also face daunting fiscal prospects currently.

In light of these issues, this paper provides new projections of the federal budget over the medium and long terms. This paper provides new projections of federal budget outcomes, using the January and March 2011 Congressional Budget Office (CBO 2011a, 2011b) projections, recent reports by the Social Security and Medicare trustees (Medicare Trustees 2011), an analysis by Medicare actuaries (Medicare Actuary 2011), and CBO's June 2011 Long-Term Projections (CBO 2011c). It updates the analysis in Auerbach and Gale (2010a, 2010b).

The analysis begins with the most recent Congressional Budget Office (CBO) baseline budget projections. CBO (2011b) projects the 2011 deficit to be $1.4 trillion, about 9.3 percent of GDP. Other than 2009, this represents the largest deficit as a share of the economy since World War II. For 2012รข??2021, the CBO baseline projects a cumulative deficit of $6.7 trillion, with deficits declining sharply to 3 percent of GDP by 2015 and hovering around 3.0 percent of GDP through 2021. This would be a reassuring outcome, at least for the medium term, except that the CBO baseline is not intended to represent likely or probable outcomes. Rather, it essentially reports the implications of the assumption that Congress does nothing over the next 10 years. All major tax provisions currently scheduled to expire are assumed to do so as scheduled, for example.

End of excerpt. The entire report with graphs and footnotes is available in PDF format.