Tuesday, January 31, 2012

CBO Highlights Impact of Upcoming Policy Decisions

The CBO has just released its budget and economic outlook for the next 10 years. The forecast indicates deficits may average anywhere from 1.5% of GDP to 5.4% of GDP from 2013 to 2022.

The CBO’s baseline scenario currently projects a $1.1 trillion deficit in 2012, moving forward, the model predicts deficits dropping to under $200 billion and averaging 1.5% of GDP from 2013 to 2022. These projections, however, are not a forecast, “rather, they are intended to provide a benchmark against which potential policy changes can be measured.”

The CBO includes an alternative fiscal scenario, in which some recent and current policies are assumed to continue despite being, by law, scheduled to change. This scenario predicts a much greater deficit going forward with deficits averaging 5.4% from 2013 to 2022. In this scenario, debt held by the public reaches 94% of GDP by 2022.

The CBO’s alternative fiscal scenario includes the following four key assumptions that set it apart from the baseline scenario. First, the model assumes that expiring tax provisions (other than the payroll tax reduction) are extended, raising $3.8 trillion from 2013 through 2022 . Second, the scenario assumes the automatic sequestration enacted by the Budget Control Act will not take effect, negating reductions in spending that average $109 billion per year. Third, the Alternative Minimum Tax is indexed for inflation, preventing the number of taxpayers affected from jumping. Finally the scenario assumes that Medicare’s payment rate for physicians’ services are held at current levels, rather than being dropped by 27% this year.

Read the report.

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