CBO's out with a new budget and economic analysis today, and as you can imagine we're all just on shpilkes going through and picking out nuggets. (A colleague just sent an email that CBO director Doug Elmendorf is on TV right now! That's Beyonce-at-Super-Bowl for us folks.)
In order to make a lot more sense out of the numbers, we have to adjust them to be on the baseline we believe to be most realistic and that will take some number of hours. The CBO must use a "current law" baseline, even when no one expects current law to hold. For example, the 10-year deficits they're now projecting are a lot bigger than the ones they were predicting in their last release. That's because the earlier release had to assume that the Bush tax cuts would all sunset, even though virtually no politicians wanted that to happen. Now, permanent tax law is such that more than 80 percent of those cuts are in place, so that's a lot of lost revenue.
Still, there are some notable things that caught my eye at first glance.
- The budget deficit is expected to decline from 7 percent of GDP in 2012 to 5.3 percent this year, but that assumes the automatic cuts take place starting next month. Deficit hawks should be happy (CBO predicts the first budget deficit below $1 trillion in years), but this is really a microcosm of the fiscal contraction/austerity agenda that's hurt the UK and European economies.
- Based on the resolution of the fiscal cliff, CBO now has a somewhat sunnier view of where the economy is heading this year. In their August report -- pre-cliff resolution -- they expected GDP to contract by 0.5 percent and for unemployment to go up from 8.2 percent to 8.8 percent (because they had to assume full cliff dive). Now they expect real GDP growth of 1.4 percent over the course of this year, and for the unemployment rate to come down very slightly. All I can say is that's very slow growth -- not fast enough to accelerate job growth much at all -- and a reminder of why dealing with the sequester is really important.
- CBO's long-term budget projection used to be for the debt-to-GDP ratio to go down -- it's that "current-law" thing again. But by locking in most of the 2001 and 2003 Bush tax cuts, the Treasury gives up $4 trillion over 10. So, under their current baseline, debt falls as a share of GDP, 2015-2018, but it starts rising again after that. Like I said, we'll have a lot more to say about this probably by tomorrow.
In one potentially exciting and portentous development, the CBO appears to be incorporating slower assumptions re the growth in health care outlays. Comparing the trajectory of outlays from 2012-22 in their prior (August) budget outlook to today's update yields these annualized growth rates:
Note the deceleration in the forecast cost growth of outlays for Medicare, Medicaid and the total of all spending of federal health care programs. No question we still face serious pressures from the sector and must push hard to both learn more about and build on whatever's behind this slowdown shown in the table. But all else equal, that's more much-needed budget oxygen.
This post originally appeared at Jared Bernstein's On The Economy blog.