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Perspectives on the Budget Outlook


The release of the Congressional Budget Office’s
new baseline budget projections on January 29 offers
the opportunity to reassess the fiscal status of the
federal government as Congress and the administration
consider a new set of budget proposals. This
article examines the current budget outlook, the magnitude
and sources of changes in the outlook since
January 2001, and adjustments to the official data that
more accurately reflect the continuation of current
policy and the government’s underlying financial
status. Based on this analysis, we also provide a very
preliminary and brief assessment of the administration’s
new budget proposals. We reach the following

  • CBO now projects a 10-year baseline unified
    surplus of $1.3 trillion for fiscal years 2004 to
    2013. But the budget outside of Social Security
    faces a baseline deficit of $1.2 trillion, and outside
    of the Medicare and Social Security Trust
    Funds, the baseline deficit is $1.6 trillion. (None
    of the figures in this article include recent tax
    proposals, a Medicare prescription drug benefit,
    or the cost of a war with Iraq. Incorporating
    these items would make the budget outlook
    look less promising.)

  • These figures represent staggering declines
    from the baseline forecasts made two years ago.
    The projected unified budget outcome for 2002
    to 2011 deteriorated from a projected surplus of
    $5.6 trillion (4 percent of GDP) in January 2001
    to essentially zero ($20 billion) in January 2003.
    The budget outcome for 2002 alone declined by
    $471 billion (4.6 percent of GDP).

  • The short-term changes are due primarily to
    worsening economic conditions, which account
    for about two-thirds of the decline in 2002 and
    about half of the projected change for 2003. The
    longer-term changes are due as much to the 2001
    tax cut—which accounts for 40 percent of the
    deterioration in the budget outlook for 2010—as to economic and technical changes, which
    account for 37 percent.

  • The official projections significantly misrepresent
    the government’s underlying fiscal
    position because of unrealistic assumptions
    regarding the continuation of current policy and
    because retirement programs are merged with
    other programs in the budget.

  • Making realistic assumptions about how current
    policies will be maintained&#151in particular,
    that expiring tax provisions are extended, a
    moderate AMT fix is provided, and real per
    capita discretionary spending is held constant&#151we estimate that the adjusted unified budget
    is in deficit for each of the next 10 years and will
    cumulate deficits of $1.1 trillion over the decade.
    These deficits emerge just from efforts to maintain
    the policy status quo. The differences between
    the official and our adjusted projections
    for the unified budget grow over time. In 2013
    alone, the difference exceeds $600 billion (3.6
    percent of GDP).

    Peter R. Orszag

    Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard

  • The unified budget figures above include large
    cash-flow surpluses accruing in trust funds for
    Social Security, Medicare, and government pensions
    over the next 10 years. But in the longer
    term, Social Security and Medicare face significant
    deficits. The adjusted budget outside of
    these trust funds faces a deficit of $4.5 trillion
    over the next decade, including an adjusted
    deficit of 4 percent of GDP in 2003 and an
    average deficit of just over 3 percent of GDP
    during the rest of the decade.

  • Policymakers face three sets of budget challenges:
    near-term deficits (over the next two years),
    medium-term deficits (over the next three to 10
    years), and long-term deficits (beyond the 10-
    year horizon). The near-term deficits are not a
    major problem in and of themselves—the economy
    could use a boost right now and unusual
    events like a war should be at least partially
    funded via deficits.

  • The implied medium- and long-term deficits,
    however, are troubling. First, our adjusted
    unified budget shows a deficit in each of the
    next 10 years, even though the economy is
    predicted to have reached full employment
    within the next few years. This indicates a persistent
    and fundamental imbalance between
    projected tax and spending policies even before
    the bulk of the baby boomers will have retired.
    Second, the medium-term deficits will be followed
    by a period in which projected deficits
    rise substantially. The time profile of projected
    deficits implies that if fiscal responsibility is not
    established in the remainder of this decade, it
    will prove much more difficult to do so after the
    baby boomers start retiring.

  • Ignoring the medium- and long-term fiscal gaps
    would represent a significant policy mistake.
    Making the fiscal gap worse would be an even
    bigger mistake. Policymakers should be particularly
    wary of proposals that would raise
    medium- and long-term deficits; that reduce
    medium-term deficits by shifting revenues from
    the future to within the 10-year budget window;
    or that detract attention from these issues.

  • The administration’s new budget is replete with
    such problematic proposals. These include
    making the 2001 tax cut permanent, massively
    expanding Roth IRA treatment of saving, encouraging
    rollovers of existing IRAs to backloaded
    saving plans, and focusing on a five-year
    budget horizon. The administration’s policies
    would produce unified “deficits as far as the eye
    can see” even though the economy is projected
    to return to full employment in a few years. The
    deficits would be much larger if the retirement
    trust funds were not included. The administration’s
    proposals would exacerbate the
    nation’s fiscal problems in the medium and long

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