Budget Projections UnderAlternative Scenarios
To illustrate how different decisions by policymakers about federal spending programs and the federal tax system would affect future deficits, CBO estimated the budgetary impact of several alternative policies (see Table 1-5 on page 18). The discussion focuses on the policies’ direct impacts on revenues and outlays, but the changes also would affect the costs of paying interest on the federal debt (shown as “debt service” in Table 1-5).
War-Related Discretionary Spending
CBO’s projections of discretionary spending for the next 10 years include outlays for operations in Afghanistan and for other possible overseas contingency operations. The outlays in the baseline come from budget authority provided for those purposes in 2011 and earlier years, the $126.5 billion in budget authority provided in 2012, and the $1.4 trillion in appropriations projected for the 2013–2022 period (under the assumption, specified in law, that annual funding is set at the 2012 amount plus adjustments for anticipated inflation; such war-related funding is not constrained by the statutory caps established by the Budget Control Act).
In coming years, the funding required for war-related activities—in Afghanistan or other countries—may be smaller than the amounts in the baseline if the number of deployed troops is smaller and the pace of operations is diminished. Thus, CBO formulated a budget scenario that anticipates a reduction in the deployment of U.S. forces abroad for military actions. Many other scenarios—some costing more and some less—also are possible. The number of U.S. active-duty, Reserve, and National Guard personnel deployed for war-related activities averaged about 195,000 in 2011, CBO estimates. Under the scenario shown in Table 1-5, the average number of military personnel deployed for war-related purposes would decline over four years: from 115,000 in 2012 to 85,000 in 2013, 60,000 in 2014, and 45,000 in 2015 and thereafter. (Those numbers could represent various allocations of forces among Afghanistan and other places.) Under that scenario and under the assumption that the related funding for diplomatic operations and foreign aid declines at a similar rate, total discretionary outlays over the 2013–2022 period would be $852 billion less than the amount in the baseline.
Other Discretionary Spending
Policymakers could vary discretionary funding in many ways from what is assumed in the baseline. For example, if appropriations grew each year through 2022 at the same rate as inflation after 2012, discretionary spending would be about $1.4 trillion higher for that period than it is in the baseline. If, in contrast, lawmakers kept appropriations for 2014 through 2022 at the nominal 2013 amount (after accounting for the nearly $100 billion reduction that will result from the automatic enforcement procedures set in the Budget Control Act), total discretionary outlays would be $904 billion lower than in the baseline for the period from 2014 through 2022. Under that scenario (sometimes called a freeze in appropriations), total discretionary spending would fall from 8.3 percent of GDP in fiscal year 2012 to 4.8 percent in 2022; by comparison, the lowest share for discretionary spending in any year since 1962 (the earliest year for which such data have been reported) was 6.2 percent in 1999.
Medicare’s Payments to Physicians
Under current law, starting in January 2013, spending for Medicare will be constrained by a rate-setting system that has existed for several years—called the sustainable growth rate—that controls the fees physicians receive for their
services. If the system is allowed to operate as currently structured, physicians’ fees will be reduced by 27 percent
in January 2013 and by additional amounts in subsequent years, CBO projects. If, instead, lawmakers override those scheduled reductions—as they have every year since 2003—spending on Medicare might be significantly greater than the amounts projected in CBO’s baseline. For example, if payment rates through 2022 stay as they are now, outlays for Medicare (net of premiums) would be $10 billion higher in 2013 and about $245 billion (or about 3 percent) higher between 2013 and 2022 than they are in the current-law baseline.
Automatic Enforcement Procedures
The Budget Control Act provides for automatic procedures to reduce discretionary and mandatory spending that take effect in fiscal year 2013 and continue through 2021. If fully implemented, those procedures will require equal reductions (in dollar terms) in defense and nondefense spending. For 2013, the reductions are to be achieved by automatically canceling a portion of the budgetary resources (an action known as sequestration) for most discretionary programs as well as for some programs and activities that are classified as mandatory spending.20 For the period from 2014 through 2021, the law requires the automatic procedures to be enforced by lowering the caps on discretionary budget authority specified in the Budget Control Act and through sequestration for
mandatory spending. If, instead, lawmakers chose to prevent those automatic cuts each year, spending would be nearly $1 trillion (or about 2 percent) higher over the 2013–2022 period than the amount now projected in CBO’s baseline. Total discretionary outlays would be $839 billion (or 6.6 percent) higher, and mandatory outlays would be $133 billion (or 0.5 percent) higher.21
Under the rules that govern CBO’s baseline, all provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 tax act, P.L. 111-312) expire by January 2013. Those expirations will increase revenues by raising individual income tax rates, reducing the child tax credit, eliminating the American Opportunity Tax Credit, raising estate tax rates, lowering the effective exemption amount for the AMT (which took effect at the end of December 2011), and making other changes. If those expiring provisions (and others that are set to expire under current law or that have recently expired) were extended through 2022, total revenues would be significantly lower than they are in the baseline. For example, if the major income tax and estate and gift tax provisions of the 2010 tax act (excluding those related to the exemption amount for the AMT) were extended beyond their expiration dates, the staff of the Joint Committee on Taxation (JCT) estimates that revenues would be lower—and, as a much smaller effect, outlays for refundable tax credits would be higher—by a totalof $2.7 trillion over the 2013–2022 period. 22
Under that scenario, the effect of reducing the amount of regular income tax that people owed would be partly offset by an increase in the number of taxpayers who would be subject to the AMT. Another policy that could alter revenues involves modifying the AMT. Because the exemption amount and brackets for the AMT are not indexed for inflation (as the parameters of the regular individual income tax are), many more people become subject to the AMT as time goes on. Under current law, that phenomenon will cause the impact of the AMT to increase sharply in coming years. If, instead, the parameters of the AMT were indexed for inflation after 2011 (with no other changes made to the tax code), federal revenues over the next 10 years would be $864 billion lower than the amount in the baseline. The number of taxpayers subject to the AMT will depend on whether the expiring tax provisions in the 2010 tax act remain in effect. If those provisions were extended and the AMT was indexed for inflation, the combination of the two changes would reduce revenues by $931 billion more than the sum of the effects of the two policy alternativesconsidered separately. Thus, the total impact ofextending certain income tax and estate and gift tax
provisions that are set to expire by January 2013 and indexing the AMT for inflation would be to reduce revenues and increase outlays for refundable tax credits over the 2013–2022 period by a total of $4.5 trillion. The budgetary cost of that alternative would be lower if certain provisions were allowed to expire that wouldotherwise have applied to married couples with annual income of $250,000 or more and single taxpayers with annual income of $200,000 or more.23
Under the policy of indexing the AMT for inflation and extending the expiring tax provisions except for the specific provisions affecting high-income taxpayers, revenues would be lowerand outlays for refundable credits would be higher by a total of about $3.7 trillion over the 2013–2022 period. That amount is about $0.8 trillion (or 18 percent) less than the $4.5 trillion total reduction in revenues and increase in outlays that would result from indexing the AMT and extending the expiring provisions for all taxpayers. If only the income tax provisions are taken into account—thus excluding the $0.4 trillion in revenue loss in both cases from extending the estate and gift tax provisions—the budgetary costs from indexing the AMT and extending the expiring provisions would be about 20 percent less as a result of allowing those provisions affecting high-income taxpayers to expire. Other tax provisions, beyond the income tax and estate and gift tax provisions, have already expired (at the end of December 2011) or are scheduled to expire in the next 10 years. If all of them (other than the payroll tax reduction of 2011 and 2012) were extended, revenues would be lower and outlays for refundable tax credits would be higher than the amounts in the baseline by $890 billion over the 2013–2022 period, JCT and CBO estimate. Therefore, the total impact of extending all expiring tax provisions (again, other than the payroll tax reduction) for all taxpayers would be to reduce revenues and increase outlays for refundable tax credits over the next decade by $5.4 trillion. Excluding the income tax provisions affecting high-income taxpayers would reduce that amount by about $0.8 trillion.
An Alternative Fiscal Scenario
If a combination of those changes to current law was made so as to maintain major policies that have been in place for a number of years, far larger deficits and much greater debt would result than are shown in CBO’s current baseline. Relative to the baseline projections for
the 2013–2022 period, deficits would rise by a totalof $7.7 trillion (including debt-service costs) to yield cumulative deficits of nearly $10 trillion over the 10-year period if the following policy decisions were made:
All expiring tax provisions (other than the payroll tax
reduction), including those that expired at the end of
December 2011, are extended;
The AMT is indexed for inflation after 2011 (starting
from the 2011 exemption amount);
Medicare’s payment rates for physicians remain
unchanged from the current amounts; and
The automatic spending reductions required by the
Budget Control Act do not take effect (although
the original caps on discretionary appropriations in
that law remain in place).
Under that scenario, revenues from 2013 to 2022 would average about 18 percent of GDP, which is equal to their 40-year average, and outlays would average about23 percent of GDP, above their 40-year average of 21 percent. Deficits would average about 5 percent of GDP
over the coming decade; by 2022, the deficit would be equal to 5.5 percent of GDP (see Table 1-6). Debt held by the public would reach about 90 percent of GDP by the end of 2022, the largest share since 1947.