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The Budget Outlook: Baseline and Adjusted Projections

Peter R. Orszag and
Peter R. Orszag
Peter R. Orszag Chief Executive Officer - Lazard
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

September 22, 2003

On August 26, the Congressional Budget Office (2003) released updated baseline
budget projections for fiscal years 2004-2013. The updated CBO figures provide an
opportunity to reassess fiscal prospects and reconsider policy options. As a preliminary
step in that direction, this paper examines the baseline CBO projections and adjusts the
official data in ways that we believe more accurately reflect the current trajectory of tax
and spending policies and the government’s underlying financial status. We reach the following main conclusions:

CBO now projects a 10-year baseline deficit of $1.4 trillion for fiscal years 2004
to 2013. The budget outside of Social Security faces a baseline deficit of $3.8 trillion

These figures represent staggering declines from the projections two and a half
years ago. The unified budget baseline for 2002 to 2011 deteriorated from a
projected surplus of $5.6 trillion in January 2001 to a projected deficit of $2.3
trillion currently, a turnaround of roughly 6 percent of GDP over the same
projection period. The baseline for fiscal year 2004 alone has deteriorated by
almost $900 billion, or almost 8 percent of GDP, since January 2001. Although
the decline in budget outcomes in 2002 was due mostly to worsening economic
conditions, most of the decline in the projected budget surplus from 2004 on is
due to tax and spending legislation enacted since 2001.

The baseline projections do not provide a full representation of the government’s
underlying fiscal position because of a variety of unrealistic assumptions
regarding current policy and because retirement programs are merged with other
programs in the main budget presentations.

If expiring tax provisions are extended, the alternative minimum tax is held in
check, and real per capita discretionary spending is held constant, the unified
budget will accumulate deficits of $4.6 trillion (3.2 percent of GDP) over the next
10 years, with deficits of about $400 billion or more in every year. These deficits
emerge just from efforts to maintain the policy status quo. The differences
between the CBO baseline and our adjusted unified budget projections grow over
time. In 2013 alone, the difference is $750 billion (4.2 percent of GDP).

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 10-year budget outside of the retirement trust funds faces a
deficit of $7.7 trillion over the next decade (5.4 percent of GDP).

Section II summarizes CBO’s recent budget projections and discusses the level
and sources of changes in the projections over time. Section III explores adjustments to
the official budget baseline. Section IV offers a set of concluding remarks.