Deja Vu All Over Again: On the Dismal Prospects of the Federal Budget
20 Pages Posted: 1 Feb 2011
Date Written: April 1, 2010
We provide new estimates of the federal budget outlook over 10-year and long-term horizons under three sets of assumptions: the Congressional Budget Office baseline, which assumes no changes in current law; an extended policy scenario, in which it is assumed that future Congresses act more or less like previous Congresses in extending expiring provisions; and the Administration budget. Under either the extended policy or the Obama policy scenarios, deficits are high and rising over the second half of the decade, despite the assumption that the economy is in full employment. In 2020, the deficit is projected to be between 5 and 7 percent of GDP and the debt/GDP ratio is projected to exceed 90 percent. These figures only deteriorate with the passage of time. The long-term fiscal gap – the size of the immediate and permanent change in spending or taxes needed to keep the long-term debt/GDP ratio at its current level – is in the range of 6-9 percent of GDP. Further health care reform can be an important part of reducing the fiscal gap, but the problem is far too large to be solved by plausible reductions in health care spending alone. Postponing the onset of a fiscal package will make the problem even harder: even just a 5-year delay in implementation would raise the required fiscal adjustment by about 0.4 percent of GDP, or almost $60 billion per year.
Keywords: federal budget, federal deficit
JEL Classification: H62
Suggested Citation: Suggested Citation