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In an update to its FY2008-18 Budget and Economic Outlook, the Congressional Budget Office (CBO) forecasts a $357 billion deficit for baseline FY2008. It projects that the deficit will decline steadily over the next few years, become a surplus of $105 billion in 2012, and improve further to a $202 billion surplus in 2018. These projected surpluses, if they materialize, will combine with economic growth to shrink federal debt held by the public from 37 percent of GDP in 2007 to 24 percent by 2018.

CBO’s baseline is not a projection of what spending and revenue will actually be. Rather, under congressional budget rules, the baseline assumes no change in tax law and limits the projected growth of discretionary spending. As a result, it omits many budget items Congress will likely enact: supplemental appropriations to pay for the war in Iraq, the War on Terror, and disaster relief, continued relief from the alternative minimum tax, extension of the 2001-06 tax cuts beyond their current expiration after 2010, and renewal of expiring provisions of the tax code. CBO’s projections also constrain the growth of discretionary spending (spending authorized by annual legislation) to the rate of inflation. Under that limitation, discretionary spending would decline from 7.6 percent of GDP in 2007 to 6.1 percent of GDP by 2018.

CBO does provide estimates of how its baseline would change if it relaxed the strict assumptions used for the official baseline. Alternative assumptions include 1) discretionary spending grows at the same rate as nominal GDP, 2) 2001 and 2003 tax cuts are extended beyond 2010, 3) expiring tax provisions are extended indefinitely, and 4) relief from the alternative minimum tax (AMT) is provided. Under those assumptions, which some people view as more likely to occur, the federal budget remains in deficit throughout the ten-year budget window and grows to nearly 4 percent of GDP in 2018.

Even with the unrealistic assumptions underlying its baseline, CBO forcefully warns that rapidly growing entitlement spending will consume an ever-larger share of the federal budget. In particular, it projects annual spending growth rates over the 2009-2018 period of 6 percent for Social Security and between 7 and 8 percent for Medicare and Medicaid, both more than double the growth rates of federal revenue the economy as a whole. The different growth rates mean that, over time, an ever-rising share of the budget will go to pay for health and retirement benefits.

CBO Baseline