WASHINGTON -- The Concord Coalition said today that new projections by the Congressional Budget Office (CBO) clearly define the trade-offs Congress and the President must confront to achieve their goal of a balanced budget by 2012. While the new baseline shows surpluses resuming in 2012, this favorable outlook assumes higher revenues from expiring tax cuts and a substantial reduction in spending growth. With such trade-offs, the budget can be brought back into balance. Without them, deficits will persist and grow worse over the coming decade -- even assuming a strong economy.
"These projections will severely test the new bipartisan political commitment to balance the budget within 5 years. If Congress and the President want to achieve their goal, they will have to choose among priorities. They can fully fund all entitlement promises for the coming decade and still balance the budget -- if they maintain tight limits on discretionary spending, allow tax cuts to expire on schedule and provide no further relief from the Alternative Minimum Tax (AMT). If, on the other hand, they choose to extend all expiring tax cuts, including AMT relief, they will need to find about $800 billion of savings from projected spending, including entitlements," said Concord Coalition executive director Robert L. Bixby.
"If the President and Congress enter into this year's budget negotiations insisting on only cutting each other's priorities, talk about a balanced budget will quickly fade and the finger pointing will begin. The most realistic chance for success would come from bipartisan negotiations with no preconditions. Both sides must be willing to compromise. It will only get more difficult to bring spending and revenues into line as the impact of the baby boomers' retirement on the budget intensifies," Bixby said.
The new CBO report shows a gradual improvement in the budget's outlook over the next decade even as the baby boom generation begins to retire. This deceptively benign outlook is not because spending on health care and retirement programs is held in check. To the contrary, between 2007 and 2017 the cost of Social Security, Medicare, and Medicaid will increase by 22 percent--from 8.8 to 10.7 percent of GDP. As a result, these three programs, which consumed 40 percent of federal spending in 2006, will consume 53 percent by 2017.
The reason for the baseline improvement is that it assumes policymakers will hold discretionary programs, including defense, to just 2 percent growth annually -- as opposed to a 5.9 percent annual average rate from 1995 through 2005 -- and that they will not enact new legislation to extend any expiring tax cuts or provide relief from the AMT.
The Concord Coalition's baseline scenario uses alternative assumptions contained in the CBO report. It reflects more plausible policies based on recent trends. Our baseline assumes:
- Appropriations rise at the same rate as economic growth (GDP), not inflation
- Funding for operations in Iraq and Afghanistan will slow gradually
- All expiring tax provisions are made permanent
- Relief from the AMT is extended
These changes turn CBO's 10-year baseline surplus of $800 billion into a deficit of $4.9 trillion. Instead of a $170 billion surplus in 2012, there would be a deficit of $400 billion. By 2017, the baseline surplus of $249 billion becomes a deficit of $777 billion.
"While much attention will understandably be paid in the coming weeks to the short-term outlook and to whether various balanced budget plans are credible, the aspect of today's report that must not be overlooked is that the fiscal and economic impact of the baby boomers' retirement is clearly coming into view. The slowing of labor force growth reduces CBO's projection of economic growth by the end of the decade and the boomers' eligibility for retirement benefits accelerates spending growth. Regardless of the mix between spending and taxes, a fiscally responsible budget plan must lay the foundation for dealing with the fiscal consequences of an aging population," Bixby said.