More from CBO’s ‘Long Term Budget Outlook’

by Bruce Webb

In a previous post I highlighted the chapter of CBO’s Long-Term Budget Outlook that pertained to Social Security. But the Report goes beyond that and in fact focuses on two different possible scenarios outlined in the following Table:

The shorthand way of defining ‘extended baseline’ is ‘Bush tax cuts expire on schedule’ while ‘alternative fiscal’ equates to ‘extending tax cuts’. There are additional components like AMT and physician compensation which have been consistently adjusted to avoid the impacts of then current law projections (feel free to expand on this in comments) but the real question boils down to ‘sunset tax cuts’ or ‘extend them’. So what would be the consequences? More figures under the fold.

Under ‘extended baseline’ the deficit in 2035 projects to be 5.6% of GDP. Is this good? Well no, I don’t think it is even acceptable. But it is a lot better place to start that the 14.6% of GDP deficit we get from ‘alternative fiscal’.

Now the above are snapshots. What if we aggregate this over 25, 50, and 75 year intervals? Well you get Box 1-1.

Now these annual and aggregated deficts all need to get financed by borrowing. How does that shake out?

So if we let the Bush tax cuts sunset we buy ourselves about 20 years to figure out what to do long-term. If we extend them we are looking at a situation by 2037 where debt held by the public is a full 200% of GDP as opposed to 75% under current law (i.e. tax cuts sunset).

So those people who are attacking Obama spending effects on the deficit over the next 10 to 20 years using CBO numbers need to confront the fact that there is a lot more long term impact from the foolish policy of tax cuts on top marginal rates.

Let the hot, hot fun begin!