CBO’s Projections Highlight Budget Challenges

SOURCE: AP/Pablo Martinez

Congressional Budget Office Director Douglas Elmendorf testifies on Capitol Hill last year. CBO projections released today strongly suggest that Congress needs to take further action to boost the economy and get the country back on a sustainable fiscal path.

By Michael Linden | January 26, 2010

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The Congressional Budget Office’s budget and economic projections released this morning simply reinforce what we already know: The country faces a long-term structural deficit driven mainly by the rising cost of health care, the aging of the population, and a chronic need for more overall revenue. These are not new revelations, but they reinforce the need for Congress to adopt a credible path back to a more balanced budget.

CBO’s long-term budget projections are hampered by the legal requirement that its baseline projections assume that provisions set to expire will—no matter how unlikely that is. This means that CBO’s outlook doesn’t include the cost of maintaining any of the Bush tax cuts, indexing the alternative minimum tax for inflation, or the annual ritual of extending a whole raft of supposedly temporary tax cuts. As a result, CBO’s projections for years beyond 2010 are likely inaccurate. Nevertheless, four kernels of interest in today’s release deserve to be highlighted.

First, CBO’s report underscores how serious our imbalance between spending and revenues is. Total revenues covered less than 60 percent of total spending in 2009. That ratio, known as the “revenue-to-spending ratio,” is going to be about the same in 2010. With a 40-percent gap between what the government brings in and what it sends out, it’s no wonder we’re seeing record high deficits. Deficits are both necessary and appropriate during a recession, and CBO reports that this year’s deficit will be down slightly from last year’s. But the long-term imbalance between revenues and spending will need to be addressed.

Second, the CBO reports that in 2010 Americans will pay the second lowest individual income taxes since 1944, as a share of the gross domestic product. The only year we paid less in individual income tax was 2009. Since individual income tax revenues have averaged around 45 percent of total revenues since 1944, the remarkable collapse in income tax receipts has had a dramatic impact on the federal bottom line. Overall revenues this year are also going to be the second lowest in American postwar history.

Third, the CBO is forecasting much slower economic growth this year and next than it did just five months ago. CBO believed that real GDP growth for 2010 would be 2.8 percent and 3.8 percent for 2011 in August 2009. This morning’s release indicates CBO revised those estimates down to 2.1 percent and 2.4 percent, respectively. On the other hand, CBO revised its estimate for real GDP growth in 2009 upwards from -1.0 percent to -0.4 percent. Similarly, CBO now projects that unemployment will stay above 9.5 percent through 2011. This is up from their August estimate of 9.1 percent. These projections highlight the need to continue the policies of the American Recovery and Reinvestment Act and expand on them—even if it means significant deficits in the short-run. In the long-run, strong economic growth coming out of the recession is every bit as key to improved revenues and a more balanced budget as cutting spending and raising taxes.

Finally, while CBO doesn’t include the cost of extending the Bush tax cuts, it does offer a separate estimate of those costs. And that separate estimate shows just how damaging it would be to permanently extend those tax cuts. Over the next 10 years the cost of making all the Bush tax cuts permanent would approach $4 trillion. This would be fiscal suicide. To have any chance of addressing the long-term budget gap Congress must first allow the tax cuts for the wealthiest to expire as scheduled.

The CBO’s annual economic and budget projections are a useful benchmark, even if they don’t always reflect reasonable assumptions about our fiscal future. And while these projections may not predict what will actually happen they strongly suggest that Congress needs to take further action to boost the economy and get the country back on a sustainable fiscal path. We’ll know more about our budgetary path come Monday morning when the president releases his fiscal year 2011 budget request.

Michael Linden is the Associate Director for Tax and Budget Policy at American Progress.

For more information, see:

• Deficits and Debt 101
• Deal with It: A Guide to the Federal Deficit and Debt
• A Path to Balance: A Strategy for Realigning the Federal Budget