Budget Blues: The Fiscal Outlook and Options for Reform

Alan J. Auerbach,
Alan Auerbach Headshot
Alan J. Auerbach Robert D. Burch Professor of Economics and Law - Economics Department, UC-Berkeley, Director - Robert D. Burch Center for Tax Policy and Public Finance
Peter R. Orszag,
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
Samara R. Potter, and William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

February 5, 2003

Preliminary Version

The other chapters in this book tend to focus on one particular area of public policy.
Should society devote more resources to helping unskilled workers get job training? Should
defense spending increase? Should we provide new tax subsidies for retirement saving? This
chapter focuses on a broader, but in some sense more straightforward, question: Once all the
individual components and policies are added together, is the government living within its
means? Are the set of tax laws that legislators have enacted consistent with the variety of
spending programs they have created?

If tax and spending decisions only had implications for the current year, it would be
straightforward to determine whether the government was living within its means: One could
simply compare revenue and spending in that year. But the economic effects of past and current
legislation play out over many years—even decades. As a result, decision makers and the public
require a clear understanding of the claims that previously enacted laws and current decisions
make on resources not only today but in the future, and on whether laws currently in place
commit the government to future taxes that equal, exceed, or fall short of future spending
obligations. Indeed, it is difficult to see how intelligent fiscal policy could be made in the
absence of such information.

Ideally, the federal budget would provide this information. In practice, it does not, at
least partially because of the difficulty of the task itself. But even compared to what is feasible
within a timely and understandable budget, current practice falls short of what would be
desirable. First, the budget uses assumptions defining current tax and spending policy that are
widely regarded as unrealistic. Second, official budget projections employ a ten-year horizon.
Practical considerations make some such limit necessary, as projections become increasingly
speculative as the horizon lengthens. But such a budget “window” excludes the fiscal effects
associated with the aging of the baby boomers, most of which occur well after the next 10 years.
Third, even within the 10-year budget window, budget projections are subject to substantial
uncertainty, in part because the economic events that affect the projections are difficult to predict