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The Budget Outlook: Baseline and Adjusted Projections


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.

    Peter R. Orszag

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

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