|
Honorable John M. Spratt Jr.
Chairman
Committee on the Budget
U.S. House of Representatives
Washington, DC 20515In response to your request, the Congressional Budget Office (CBO) has analyzed the long-term budgetary effects of several policy scenarios.
In The Long-Term Budget Outlook, published in December 2007, CBO presented various measures of long-term (75-year) outcomes for the budget under two projection scenarios: an "extended-baseline scenario" and an "alternative fiscal scenario." The extended-baseline scenario, which adheres closely to current law, follows CBO’s 10-year baseline from 2008 to 2018 and then extends the baseline concept in its projections for the rest of the 75-year projection period, to 2082. Under that scenario, the Medicare program continues to operate as specified under current law and the changes in tax rates and in other provisions of the tax code that are specified in current law occur as scheduled. By comparison, the alternative fiscal scenario deviates from CBO’s baseline projections even during the next 10 years, incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past.
As requested in your letter, CBO has analyzed three variations of the extended-baseline scenario, which would follow the assumptions of that scenario but with the following differences:
■
The first variation would eliminate spending for Medicare Part D (the prescription drug benefit) in 2008 and later;
■
The second variation would permanently extend the individual income tax provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), and the Working Families Tax Relief Act of 2004 (WFTRA) that are currently scheduled to expire after 2010;1 and
■
One of the measures of long-term outcomes that CBO presented in its December report was the fiscal gap. As used there and in this context, the gap is defined as the immediate and permanent change in spending or revenues that would reduce the government’s projected debt in 2082 to its current level as a share of gross domestic product (GDP).
Under the extended-baseline scenario, the fiscal gap, measured as a percentage of GDP, would be 1.7 percent, CBO estimates. In 2082, federal debt would account for 240 percent of GDP, net interest would total 11 percent of GDP, and the total deficit would account for 18 percent of GDP.
For the alternative 75-year scenarios you specified, CBO’s analysis indicates that outcomes would differ from those projected under the extended-baseline scenario as follows:
■
Under the extended-baseline scenario’s assumption about taxes (that is, provisions scheduled to expire are allowed to do so) and the assumption of no spending for Medicare Part D after 2007, the present value of outlays over the 2008—2082 period would be lower (by 0.9 percent of GDP).2 The fiscal gap would be correspondingly reduced, resulting in a projected fiscal gap of 0.8 percent of GDP. Federal debt would rise to 130 percent of GDP in 2082 (rather than 240 percent of GDP). In that year, net interest would be 6 percent of GDP, and the total deficit would be 11 percent of GDP.
■
Alternatively, under the assumptions that the expiring income tax provisions are instead extended and Medicare Part D continues to operate as it does under current law, the present value of revenues over the 75-year period would be lower (by 0.7 percent of GDP), resulting in a projected fiscal gap of 2.4 percent of GDP. Federal debt would rise to 326 percent of GDP in 2082. Net interest in 2082 would be 15 percent and the total deficit 23 percent of GDP.
■
Under the assumptions that the expiring tax provisions are extended and no spending occurs for Medicare Part D after 2007, outlays and revenues would both be lower (by 0.9 percent and 0.7 percent of GDP, respectively), resulting in a fiscal gap of 1.5 percent of GDP. Federal debt would rise to 217 percent of GDP in 2082, and net interest would be 10 percent and the total deficit 16 percent of GDP.
CBO’s estimates of the effects of extending the provisions of EGTRRA, JGTRRA, and WFTRA beyond their scheduled expiration at the end of 2010 are sensitive to assumptions about possible changes to the alternative minimum tax (AMT). Therefore, CBO also calculated the incremental effects of extending the tax provisions under the assumption that legislation had first been enacted to index the AMT’s 2007 parameters (including the higher exemption amounts for that year) for inflation. If the AMT was indexed, the incremental effect of extending the individual income tax provisions would be greater: Such an extension would reduce the 75-year present value of revenues by 1.4 percent of GDP (in addition to the loss of revenues that would result from indexing the AMT) rather than by 0.7 percent of GDP—the reduction under the extended-baseline scenario.
For its long-term budget outlook, CBO limited its analysis to the estimated effects of extending the individual income tax provisions of EGTRRA, JGTRRA, and WFTRA and did not assess the effects of permanently extending provisions applicable to the estate and gift tax. If the only result of extending the estate and gift tax provisions were to eliminate all revenues from those taxes from CBO’s long-term baseline, the fiscal gap would increase by an additional 0.7 percent of GDP over the next 75 years.
The attached tables present estimates of the 75-year present values of revenues and outlays, the 75-year fiscal gap, the budget deficit and net interest spending in 2082, and the ratio of debt to GDP under the specified scenarios. (The values for those estimates under CBO’s extended-baseline and alternative fiscal scenarios are taken from The Long-Term Budget Outlook.)
I hope this information is helpful to you. The staff contact is Noah Meyerson, who can be reached at 225-2592.
Peter R. Orszag
Directorcc: Honorable Paul Ryan
Ranking Member
As noted in the text below, CBO’s analysis does not incorporate the effects of extending the gift and estate tax provisions of this legislation. The fiscal gap (defined in the text) would increase by an additional 0.7 percent of gross domestic product over the next 75 years if the only result of extending the estate and gift tax provisions were to eliminate all revenues from those taxes from CBO’s long-term baseline.
The present value is a single number that summarizes a flow of current and future revenues or outlays, taking into account the time value of money.
|
|