SOURCE: TAX POLICY CENTER
http://www.taxpolicycenter.org/taxtopics/budget/cbobaseline.cfm
The Federal Budget: The CBO Baseline
Underlying data: download
In an update to its FY2008-18 Budget and Economic Outlook, the Congressional Budget Office
(CBO) forecasts a $357 billion deficit for baseline FY2008. It projects that the deficit will
decline steadily over the next few years, become a surplus of $105 billion in 2012, and improve
further to a $202 billion surplus in 2018. These projected surpluses, if they materialize, will
combine with economic growth to shrink federal debt held by the public from 37 percent of GDP
in 2007 to 24 percent by 2018.
CBO’s baseline is not a projection of what spending and revenue will actually be. Rather, under
congressional budget rules, the baseline assumes no change in tax law and limits the projected
growth of discretionary spending. As a result, it omits many budget items Congress will likely
enact: supplemental appropriations to pay for the war in Iraq, the War on Terror, and disaster
relief, continued relief from the alternative minimum tax, extension of the 2001-06 tax cuts
beyond their current expiration after 2010, and renewal of expiring provisions of the tax code.
CBO’s projections also constrain the growth of discretionary spending (spending authorized by
annual legislation) to the rate of inflation. Under that limitation, discretionary spending would
decline from 7.6 percent of GDP in 2007 to 6.1 percent of GDP by 2018.
CBO does provide estimates of how its baseline would change if it relaxed the strict
assumptions used for the official baseline. Alternative assumptions include 1) discretionary
spending grows at the same rate as nominal GDP, 2) 2001 and 2003 tax cuts are extended
beyond 2010, 3) expiring tax provisions are extended indefinitely, and 4) relief from the
alternative minimum tax (AMT) is provided. Under those assumptions, which some people
view as more likely to occur, the federal budget remains in deficit throughout the ten-year
budget window and grows to nearly 4 percent of GDP in 2018.
Even with the unrealistic assumptions underlying its baseline, CBO forcefully warns that rapidly
growing entitlement spending will consume an ever-larger share of the federal budget. In
particular, it projects annual spending growth rates over the 2009-2018 period of 6 percent for
Social Security and between 7 and 8 percent for Medicare and Medicaid, both more than double
the growth rates of federal revenue the economy as a whole. The different growth rates mean
that, over time, an ever-rising share of the budget will go to pay for health and retirement
benefits.
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