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Washington Highlights

CBO Projects Drop in Federal Deficit

February 3, 2012—In its annual long-term budget and economic outlook, the Congressional Budget Office (CBO) Jan. 31 projected the federal budget will show a deficit of $1.079 trillion in fiscal year (FY) 2012, assuming current laws governing tax and spending policies remain unchanged. This shortfall would be more than $200 billion less than the FY 2011 deficit of $1.296 trillion.

Measured as a share of gross domestic product (GDP), the FY 2012 deficit will be 7.0 percent, nearly 2 percentage points below the deficit recorded last year but still higher than any deficit between 1947 and 2008.  CBO’s baseline, which reflects changes in tax and spending policies mandated in current law, also projects deficits will drop markedly over the next few years, averaging 1.5 percent of GDP between FYs 2013 and 2022.

To illustrate the budgetary consequences of maintaining certain tax and spending policies, CBO also developed projections under an “alternative fiscal scenario,” which incorporates the following assumptions: 

  • expiring tax provisions (other than the payroll tax reduction) are extended;
  • the Alternative Minimum Tax (AMT) is indexed for inflation after 2011;
  • Medicare’s physician payment rates are held constant at their current level (rather than dropping by 27 percent in March 2012 as scheduled under current law); and
  • the automatic spending reductions required by the Budget Control Act (P.L. 112-25) in the absence of action by the Joint Select Committee on Deficit Reduction do not take effect.

Under the alternative fiscal scenario, deficits over the FY 2013–2022 period would be much higher, averaging 5.4 percent of GDP, rather than the 1.5 percent reflected in CBO’s baseline projections.  Deficits for the next decade under the alternative fiscal scenario would total $10.981 trillion, compared to $3.072 trillion under the CBO baseline.  

CBO cautions, “Even if the fiscal policies specified by current law come to pass, budgetary challenges over the longer term remain—and the challenges will be much more acute if those policies do not remain in place.”  The report notes that under both CBO’s baseline and its alternative fiscal scenario, the aging of the population and rising costs for health care will push spending for Social Security, Medicare, Medicaid, and other federal health care programs considerably higher as a percentage of GDP.  If that increased spending is coupled with historic levels of revenues, CBO projects “the resulting deficits will increase federal debt to unsupportable levels.”

Contact:

Dave Moore
Senior Director, Government Relations
Telephone: 202-828-0559
Email: dbmoore@aamc.org

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Jason Kleinman
Sr. Legislative Analyst, Govt. Relations
Telephone: 202-903-0806
Email: jkleinman@aamc.org