US Government Debt Different - Finance Department - University of ...

Deborah LucasProjected Size of Deficits and Debt103Most long-term fiscal projections show imbalances between spendingand taxes that continue to grow indefinitely into the future, butthe path of projected deficits varies significantly depending on theunderlying assumptions about future policies, prices, and interestrates. For example, the Extended Baseline Projection made by CBO,which is the basis for congressional deliberations about the budget,assumes that current law will remain unchanged. 2 CBO is furtherrequired by law to assume that for discretionary programs (whichinclude defense) costs will grow at the rate of inflation. Those rulesunderstate expected future deficits and debts because they imply thecontinuation of money-saving policies that most observers believeare unlikely to remain in place. For example, current law includes anexpiration of the Bush tax cuts, no reduction in the growing coverageof the alternative minimum tax, and effective caps on compensationto Medicare health care providers. Under those assumptions, theprimary deficit — the deficit not including interest payments — isclose to zero through 2035 (see the top panel of Figure 2). To providea more plausible alternative, CBO constructs an “Alternative FiscalScenario,” which takes into account tax and spending changes thatseem highly probable. Under that alternative, the projected primarydeficit is projected to grow to over 6 percent by 2035 (see the bottompanel of Figure 2).The deficits shown in Figure 2, together with projected interest payments,imply the future levels of debt held by the public shown inFigure 3. There is a wide difference in accumulated debt in 2050between the Extended Baseline Scenario and the Alternative FiscalScenario: over 200 percent in the first case versus less than 50 percentin the latter. The difference underscores the sensitivity of fiscalprojections to the assumptions made about highly uncertain policies.My own conclusions from having worked on and studied manyof these sorts of analyses are on the one hand optimistic: There arenon-draconian combinations of tax increases and spending cuts thatwould stabilize the debt at sustainable levels. On the other hand,2 See, for example, Congressional Budget Office, CBO’s 2011 Long-Term BudgetOutlook, June 2011.