OMB Watch :: Tax and Budget Staff Notes :: August, 26 2003

Beyond the Baseline:
10 Year Deficits Likely to Reach $5.9 Trillion

John S. Irons

Deficit Projections

The Congressional Budget Office’s (CBO) August 2003 Budget and Economic Update released today shows a baseline projection of a $401 billion deficit for 2003, and a $480 billion deficit for 2004. The 10-year baseline projections show a $1.4 trillion deficit over the next ten years; however, as the report notes, the baseline is not intended to be a good predictor of actual budgetary outcomes. A better predictor of budget deficits under current policy would put the deficit for 2004 at $496 billion and the 10-year deficit at nearly $6 trillion.

The lower, baseline figures that are reported by the CBO are due to the fact that, by law, the CBO baseline must estimate future revenues and expenditures under current law. A more realistic prediction of the 10-year deficits would include legislative changes that are likely to occur. The CBO’s report does contain estimates of the cost for a few likely changes. The legislative options included in the report are:

1. Extension of expiring tax provisions;
2. Reforming the Alternative Minimum Tax to index 2004 levels to inflation;
3. Medicare changes including a prescription drug benefit at cost levels allocated in the current budget resolution; and
4. Four different assumptions about the growth of discretionary spending

• Freeze at 2003 levels,
• Increase at the rate of inflation,
• Increase at the rate of total output (nominal GDP), and
• Increase at historical (1998-2003) rate of 7.7%.

Using the numbers produced by the CBO, we can construct a more realistic prediction of deficits under current policy. Table 1 and Figure 1 show the projections under the CBO baseline as well as under the OMB Watch’s “current policy” baseline, which assumes that policy options 1-3 from above are in place, and discretionary spending is assumed to grow at the same rate as total output. The inclusion of these provisions gives us a better measure of deficit projections under current policy priorities, as well as a better predictor of actual deficits.

When these provisions and the additional debt service are included, the deficit for 2004 is projected to be $496 trillion. Over the next 10 years, the estimate of the total deficit rises to $5.9 trillion, and there is no improvement in the budget situation as currently projected under the CBO baseline. In addition, when the Social Security trust fund is removed from the calculations, the 10-year deficit rises to $8.3 trillion (see Table 2.) Figure 2 shows that the budget situation under the likely policy scenario will continue to deteriorate through 2013. With the increase in retirees necessitating increased Social Security and Medicare expenditures, the situation is not projected to improve after 2013, unless policy is changed.