Wednesday, February 1, 2012

CBO Report: Beware the "Alternative Scenario"

The headline of most reports on CBO's recent budget report were that the annual budget deficit would decline in future years, eventually dipping below 2% of GDP later in this decade.
But readers must take note that this CBO baseline is based on the assumption that the entirety of the Bush tax cuts (upper and middle class) are allowed to expire, that doctor reimbursement rates are slashed dramatically(as scheduled under current law), that the alternative minimum income tax is allowed to impact more and more middle income families, and that the automatic spending cuts required in last year's debt limit deal (including large defense cuts) will be triggered.
If you are a deficit hawk and support these policies - then gridlock is good. Congress must act to change this CBO baseline.
But CBO has constructed an "alternative fiscal scenario," that analyzes what happens to the deficit if Congress reverses these very unpopular measures.

Our annual deficits in 2022 would be about 6% of GDP and our total debt, would rise to 94% of GDP, the highest figure since just after World War II. 

In this political year, not much is likely to happen other than a possible extension of the payroll tax cut (with possible offsets to blunt the budget impact).  The fireworks are likely to occur in 2013.  That is when we have either a new or newly elected president and the biggest ticket item in the alternative scenario - the Bush tax cuts - will expire.   Only then we will know of our political system is capable of managing this problem, or if we are doomed to follow the "alternative scenario."

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