Breaking Down the CBO Budget Outlook

February 7, 2013

This month, the Congressional Budget Office (CBO) released its “Budget and Economic Outlook” for 2013-2023. The report includes information on a ballooning debt, skyrocketing healthcare costs and an unemployment rate that is at the highest level of sustained unemployment in 70 years. The report makes it clear that policies in Washington aren’t addressing the serious effect that government spending is having on our economy.

THE CBO BASELINE: AN INTRODUCTION
Twice a year, the nonpartisan CBO releases a baseline, which was created by the Balanced Budget and Emergency Deficit Reduction Act of 1985. What is the baseline? According to the CBO, the baseline:

…is intended to provide a neutral, nonjudgmental foundation for assessing policy options. It is not “realistic,” because tax and spending policies will change over time. Neither is it intended to be a forecast of future budgetary outcomes. Rather, the projections … reflect CBO’s best judgment about how the economy and other factors will affect federal revenues and spending under existing policies.1

In other words, when you hear how much a bill costs on the news, it is measured against the CBO baseline, which, as explained above, represents the CBO’s estimate of government spending and revenue based upon current law over the next 10 years.2

There are three major problems with the baseline:

  1. “Baseline projections are only as accurate as the assumptions underlying them.”
    • Since Washington often passes “temporary” measures on a regular basis, such as a one-year blocking of a formula that would cut Medicare’s payments to doctors, it is assumed provisions like these will expire, although they are often extended on a “temporary basis.”
  1. “Budget baseline estimates and projections are highly sensitive to small changes in underlying assumptions and economic factors.”
  2. “Baseline projections are limited to a 10-year period….” In other words, when the CBO says a bill costs a certain amount, it is only calculated over a 10-year window.3

Regardless of the laws associated with the CBO baseline, it is the measuring stick Congress uses and is essential in the budget process. On Feb. 5, 2013, the CBO updated its baseline in the Budget and Economic Outlook report.4 Below, we list our takeaways from the report.

THE CBO REPORT: THIS YEAR’S TAKEAWAYS5

  • “If current laws remain in place, the Congressional Budget Office (CBO) estimates, the federal budget deficit will total $845 billion in fiscal year 2013.”
    • As a point of reference, last year’s deficit was $1.1 trillion. Again, it is important to note that the $845 billion deficit projection assumes current law remains in place.
  • Because of the rising debt, “lawmakers will have less flexibility than they ordinarily might to use tax and spending policies to respond to unanticipated challenges.”

Why is the debt continuing to increase over this 10-year period?

  • “The aging of the population.”  This affects things like Social Security and Medicare as more seniors become eligible for these programs.  Social Security generally creates a “basic level of monthly income” once an individual reaches retirement age.6 Medicare generally provides healthcare coverage for individuals in the United States who are 65 and older until their death.7
  • “The rising costs of health care,” which increases costs for things like Medicare and Medicaid. Medicaid provides healthcare for low-income individuals and is funded by both the federal and state governments.8
  • “The scheduled expansion in federal subsidies for health insurance will substantially boost federal spending…for the next 10 years and for decades thereafter.”
  • According to the CBO, “Unless the laws governing those programs are changed—or the increased spending is accompanied by corresponding reductions in other spending, sufficiently higher tax revenues, or a combination of the two—debt will rise sharply.”

THE CBO REPORT: LOOKING 10 YEARS AHEAD9
Here are some highlights from the report:

  • Steadily increasing debt: Overall, the CBO predicts the debt to continue to rise for the next 10 years. By 2023, baseline reports show debt equal to 77 percent of the size of the economy and rising.
  • Stagnant employment: Unemployment is expected to remain above 7.5 percent throughout 2013 and into 2014. If this happens, it will be the sixth consecutive year of unemployment above 7.5 percent, representing the longest such stint in 70 years.

BA SUMMARY OF THE CBO BUDGET OUTLOOK: SPENDING IS THE PROBLEM10
Under current law, what the government takes in from taxes will increase 25 percent between 2013 and 2015. Further, the federal government is projected to take in 19.1 percent in taxes relative to the size of the economy by 2015.  Over the past 40 years, the historical average of this figure is 17.9 percent.

Meanwhile, by 2017 federal spending will represent 21.5 percent of the total economy, higher than the 40-year historical average of 21 percent.  By 2023, federal government spending relative to the size of the economy is projected to reach 23 percent.

Interest rates–the cost to fund the country’s deficit spending–are set to skyrocket.  Last year, the country spent $223 billion in interest.  In 10 years, that number is projected to hit $857 billion.

  • To put that number in context, for the upcoming fiscal year the government is projecting to spend $854 billion on Social Security.
  • According to the CBO, by the end of the decade “the nation’s net interest costs will be very high (after interest rates return to more normal levels) and rising.  Higher costs for interest eventually will require the government to raise taxes, reduce benefits and services, or undertake some combination of those two actions.”

What does all this mean?  Under current law, the debt continues to rapidly increase, which increases “the risk of a financial crisis.”

GOVERNING BY CRISIS, CREATING ECONOMIC UNCERTAINTY
It’s time for Washington to stop governing from crisis to crisis. It’s time to get serious about deficit reduction.

  1. Congressional Research Service. Budget Process Reform: Proposals and Legislative Actions in 2012. March 2, 2012. Page 4. http://assets.opencrs.com/rpts/R42383_20120302.pdf
  2. Congressional Research Service. Budget Process Reform: Proposals and Legislative Actions in 2012. March 2, 2012. Page 4. http://assets.opencrs.com/rpts/R42383_20120302.pdf
  3. Congressional Research Service. Baseline Budget Projections: A discussion of Issues. February 7, 2008. http://assets.opencrs.com/rpts/RL31414_20080207.pdf
  4. Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years 2013 to 2023. February 5, 2012. http://www.cbo.gov/publication/43907
  5. Unless otherwise noted, all numbers in this section are taken from “The Budget and Economic Outlook: Fiscal Years 2013 to 2023. “ February 5, 2012. http://www.cbo.gov/publication/43907
  6. U.S. Social Security Administration. The Future Financial Status of the Social Security Program. http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
  7. Centers for Medicare and Medicaid Services. Medicare & You. 2013.  http://www.medicare.gov/Pubs/pdf/10050.pdf
  8. National Conference of State Legislatures. Medicaid FAQ. http://www.ncsl.org/issues-research/health/archive-medicaid-faq.aspx
  9. Unless otherwise noted, all numbers in this section are taken from “The Budget and Economic Outlook: Fiscal Years 2013 to 2023. “ February 5, 2012. http://www.cbo.gov/publication/43907
  10. Unless otherwise noted, all numbers in this section are taken from “The Budget and Economic Outlook: Fiscal Years 2013 to 2023. “ February 5, 2012. http://www.cbo.gov/publication/43907

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