Constructing a "Current Policy" Baseline

Today, US Budget Watch released The Cost of “Current Policy”. In this analysis, we show that, while deeply troublesome, CBO’s $7.1 trillion ten-year deficit projection is, if anything, optimistic. Continuing some current policies – such as renewing the 2001/2003 tax cuts, patching the AMT, averting cuts in Medicare physician payments, and allowing discretionary spending to grow at its historical pace – will result in significantly higher deficits. Given this, policymakers must think carefully about which of these policies are in fact worth continuing and how they will pay for them.

Over the next ten years, we estimate a current policy baseline would result in cumulative deficits of nearly $12.6 trillion. The numbers are derived by taking CBO’s current law baseline deficit -- $4 trillion over five years and $7.1 trillion over ten years – and then adding the effects of several “selected policy alternatives” found on Table 7-1 of the latest CBO report.

We assume the extension of the 2001/2003 tax cuts, set to expire at the end of 2010, which by itself increases the ten year deficit by $2.3 trillion. We also assume policymakers will continue to “patch” the AMT, in order to prevent it from hitting middle-income earners; this would cost nearly $450 billion by itself, along with another $514 billion because of its interaction with the continuation of the 2001/2003 tax cuts.

On discretionary spending, we make two major assumptions. First, the Iraq war will slowly phase down, so that by 2014 a total of 75,000 troops will be deployed in Iraq and Afghanistan; this measure would save over $700 billion compared to CBO’s baseline. Second, normal discretionary spending will grow with GDP, rather than inflation; this would result in roughly $1.7 trillion of higher spending.

Finally, we use a recent CBO estimate of the cost of freezing updates to physicians payments, rather than allowing large cuts over the next few years. This would cost around $285 billion.

We then calculate the new interest payments which would need to be paid on the higher level of debt under this baseline. Summing the costs together, we estimate that continuing current policies would increase the ten year deficit by well over $5 trillion to $12.6 trillion.

Current Law Baseline $3,988 $7,137
2001/2003 Tax Cuts +$849 +2,296
AMT Patch +$177 +$448
Interactions Effect +$159 +514
Faster Discretionary Spending Growth +$393 +1,698
Phase-down of Iraq Spending -$179 -$713
Medicare Physician Pay Patch +$87 +$285
Net Interest +$104 +$911
Current Policy Baseline$5,578$12,576

The lack of a clear definition of current policy means that different assumptions can lead to different deficit levels. The Office of Management and Budget, for example, projects a $10.6 trillion current policy deficit over the next decade. The Concord Coalition, meanwhile, projects a "plausible baseline" deficit of $14.4 trillion. But the magnitude of the problem doesn't change under any projections, nor does the inherent unsustainability of our current fiscal path.

Read The Cost of "Current Policy" here.