Only Our Government!
Last week, the Congressional Budget Office released “The 2012 Long-Term Budget Outlook.” I want to share a few interesting charts with you.
Extended Baseline vs. Alternative Fiscal Scenario. The CBO makes two sets of projections. The extended baseline is based on current law. For example, it’s based on the assumption that the Bush tax cuts will lapse, income tax rates will increase and the payroll tax holiday (that lowered the employee portion from 6.2% to 4.2%) will end.
The alternative scenario is based on more realistic assumptions. The CBO assumes that certain policies that have been in place for a number of years will be continued.
You decide which scenario you think is more realistic. Below, you will see the simple consequences of each scenario. The extended baseline scenario assumes that we’re going to start running budget surpluses very soon. The alternative scenario assumes deficits. See chart below.
Here’s where we’re headed. If you believe that the alternative scenario is more likely, the result of these deficits is that our debt-to-GDP ratio will increase significantly over the next 25 years. See chart below.
The next 75 years. Of course, we should be interested in our debt levels over a longer time period than just 25 years. As the CBO stated, “Because considerable interest exists in the longer-term outlook, figures showing projections through 2087 are presented in Appendix B.” Look at the chart they gave us in Appendix B:
Only the government would give us a chart like this. It doesn’t show us what is going to happen with the alternative scenario through 2087 — it’s cut off in the early 2040s. Pretty absurd.
The fiscal gap. The CBO also tells us how much we have to either reduce spending or increase revenues in order to maintain our debt-to-GDP ratio. If we want to have the same debt-to-GDP ratio in 2087 that we have today, we need to immediately increase revenue or decrease spending by 8.7% of GDP. Realize that our tax revenues have averaged 18.5% of GDP for the past 65 years. So we’d have to increase our tax revenue by 47% immediately – simply to maintain where we are. Or, we’d have to decrease spending by approximately 40% (spending is a higher number, so the percent that it has to be decreased is smaller).
All I can say is that it’s no wonder that the CBO didn’t want us to see the whole chart.
Have a great week.
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