CBO: Deficits will drop, thanks to measures that will never take effect

posted at 11:25 am on August 24, 2011 by Ed Morrissey

The CBO can only score what is in front of them, so their assessment today that budget deficits will decline sharply in the next few years has some rational basis in statutory law.  In reality, they may as well be predicting Paul Krugman’s War of the Worlds economics.  Here’s what they predict for deficits as percentages of GDP:

If the recovery continues as CBO expects, and if tax and spending policies unfold as specified in current law, deficits will drop markedly as a share of GDP over the next few years. Under CBO’s baseline projections, which generally reflect the assumption that current law will not change, deficits fall to 6.2 percent of GDP next year and 3.2 percent in 2013, and they average 1.2 percent of GDP from 2014 to 2021.

Here’s what they say will cause this sudden closure of the deficit:

  • Certain provisions of the 2010 tax act, including extensions of lower rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act (ARRA), expire at the end of 2012;
  • The two-year extension of provisions designed to limit the reach of the alternative minimum tax, extensions of emergency unemployment compensation, and the one-year reduction in the payroll tax all expire at the end of 2011;
  • Sharp reductions in Medicare’;s payment rates for physicians’ services take effect at the end of 2011;
  • Funding for discretionary spending declines over time in real terms, in accordance with the caps established under the Budget Control Act; and
  • Additional deficit reduction totaling $1.2 trillion over the 2012–2021 period will be implemented as required under the Budget Control Act.

The first point, the Bush-era tax rate schedules, will be a hard-fought battle in 2012, especially if the economy still hasn’t started producing jobs.  The CBO estimates that the US economy will finish this year at a 2.3% GDP growth rate for 2011, a neat trick for an economy that has grown at 0.8% in its first two quarters, and at 2.7% in 2012.  JP Morgan estimates that it will finish at 1.5% this year and 1.3% next year, and the difference is significant in terms of revenues and deficit projections.  CBO uses their numbers to project an 8.5% unemployment rate by the end of next year, but above 8% all through 2013.

If that’s the case, a tax increase across the board — which is what the law states now — will hammer investment and consumer spending across a broad range of the American public.  If Congress only repeals the lower-income rate increases, then trillions of dollars that would go to the CBO’s projections of deficit reduction would disappear; if all are repealed, add another $700 billion for the so-called wealthy … and that’s using static tax analysis.

What else does the CBO assume?  They assume that Congress will let the AMT hammer more of the middle class, rather than pass the patch that they always apply to keep the middle class from booting them from office.  They also assume that Congress won’t apply a doc-fix patch to Medicare, which they have done every time the cuts have become ready to be implemented, in order to keep providers from bailing out of the Medicare system altogether.  The CBO also assumes that future Congresses will abide by the discretionary cuts put in place by the Budget Control Act for the next decade, and that they will also comply with those cuts that come from the joint select committee in November over the same period of time.

In other words, the view from Fantasyland looks pretty darned good.

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So, when you take out all the un-necessary words, the CBO said:

Deficits will be reduced when taxes are raised and benefits are reduced.

Well, Duh.

BobMbx on August 24, 2011 at 11:30 AM

even in these unicorn-flavored projections, there is still work to be done for real “balance” in the federal checkbook’s bottom line.

johnny alpha on August 24, 2011 at 11:31 AM

Do we really need the CBO..?

d1carter on August 24, 2011 at 11:31 AM

MSM version of the story:

If the recovery continues as CBO expects, and if tax and spending policies unfold as specified in current law, deficits will drop markedly as a share of GDP over the next few years. Under CBO’s baseline projections, which generally reflect the assumption that current law will not change, deficits fall to 6.2 percent of GDP next year and 3.2 percent in 2013, and they average 1.2 percent of GDP from 2014 to 2021. Thank you President Obama!

forest on August 24, 2011 at 11:33 AM

The CBO can no longer be considered middle of the road or truthful. The obambi admin finally wore them down as well.

VegasRick on August 24, 2011 at 11:34 AM

It’s so great that the GOP continues to play by these idiotic rules. Let the CBO work in such a way as to be completely useless but a political cover for democrats. Boehner stinks.

joeindc44 on August 24, 2011 at 11:34 AM

From that wise philosopher…

Practically all the relationships I know are based on a foundation of lies and mutually accepted delusion.
- Kim Cattrall

faraway on August 24, 2011 at 11:34 AM

Isn’t the CBO supposed to be unbiased, and non partisan?

Either they’ve been threatened, or they are willingly shilling for their Master, Obama.

capejasmine on August 24, 2011 at 11:36 AM

And when history repeats itself with another world war we’ll shooting skittles at each other…

Chip on August 24, 2011 at 11:36 AM

Certain provisions of the 2010 tax act, including extensions of lower rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the American Recovery and Reinvestment Act (ARRA), expire at the end of 2012;

I’d like to see the numbers on just the deductions and credits. Off hand, I’d like to see those go away while the rates stay the same or go down on the upper end.

Count to 10 on August 24, 2011 at 11:37 AM

If the CBO is tasked with a forecast that has unreasonable and completely unlikely assumption, they should refuse to perform the work. Anything else means that they are being used for political propaganda and destroys what little credibility that they have left.

slickwillie2001 on August 24, 2011 at 11:40 AM

MSM version of the story:

If the recovery continues as CBO expects, and if tax and spending policies unfold as specified in current law, deficits will drop markedly as a share of GDP over the next few years. Under CBO’s baseline projections, which generally reflect the assumption that current law will not change, deficits fall to 6.2 percent of GDP next year and 3.2 percent in 2013, and they average 1.2 percent of GDP from 2014 to 2021. Thank you President Obama!

forest on August 24, 2011 at 11:33 AM

You forgot: Only if the enemy Tea Party Terrorist hobbits get out of the way and let Obama dictate what he wants.

Chip on August 24, 2011 at 11:41 AM

The CBO estimates that the US economy will finish this year at a 2.3% GDP growth rate for 2011

Is the CBO on drugs?

Weight of Glory on August 24, 2011 at 11:41 AM

And they didn’t even get to add in the VAT tax we’ll get pitched with as soon as Obama can figure our how to try and sell it (when he gets back and around to it.)

Everything’s coming up roses!

golfmann on August 24, 2011 at 11:41 AM

Do we really need the CBO..?

d1carter on August 24, 2011 at 11:31 AM

Nope, we don’t. Not at all. The CBO is like a calculator, all it does is take the numbers entered, and add them up. Garbage in garbage out essentially. Until you “fix” the problem of giving them bogus numbers, they are pretty much useless.

Tim Zank on August 24, 2011 at 11:42 AM

There have been 5 times since the end of World War II that federal tax revenues approached or exceeded 19.0% GDP:

- 1952 (followed by a recession in 1953)
- 1969-1970 (with a recession touched off at the end of 1969 and extending through 1970)
- 1979-1982 (the infamous stagflation in 1980 at the front end of a double-dip recession)
- 1997-2000 (recession temporarily forestalled by both lowered capital gains tax rates and highly-manipulated interest rates, politically-defined recession in 2001 though it didn’t meet the GDP definition, came very close to the classical definition in both 2000 and 2001)
- 2007 (our current Double-Dip DEMpression™)

If anybody believes the economy won’t revolt a sixth time come 2013 and the fed’s projected 19.0% GDP seizu…er, tax take, or the 20.1%+ GDP it’s supposed to take every year starting in 2014, I will buy your gold from you.

Steve Eggleston on August 24, 2011 at 11:42 AM

Recovery?

*blink, blink*

The CBO is living in a place as vast as infinity which is the amount of money the Fed. will print, and as timeless as static-based projections can allow. It is a dimension between the bottomless pits of our Congressional wants and the Summit of our stupidity… where light and dark have no meaning as the power has gone out permanently and the lightbulbs no longer last, anyways… we call this, the Legislative Zone.

ajacksonian on August 24, 2011 at 11:42 AM

So historical precedence is what keeps the media from mentioning the little doctor fix while slamming all talk of Medicare reforms?

Cindy Munford on August 24, 2011 at 11:42 AM

Sunshine, lollipops and rainbows,
Everything that’s wonderful is sure to come our way

And I was worried we were going to have big deficits for the next decade.

WashJeff on August 24, 2011 at 11:44 AM

Remember this?

JibJab.com – Time for Some Campaignin’

Speakup on August 24, 2011 at 11:45 AM

Krugman may be on to something, but I’d go a step further.

Sure, an invasion by space aliens would rev up the economy if we had advanced notice. But think of how much better it would be if we invaded them! We could ramp up for decades!

Akzed on August 24, 2011 at 11:47 AM

If anybody believes the economy won’t revolt a sixth time come 2013 and the fed’s projected 19.0% GDP seizu…er, tax take, or the 20.1%+ GDP it’s supposed to take every year starting in 2014,

Steve Eggleston on August 24, 2011 at 11:42 AM

Your numbers do not even take into account eh state and local tax burden. I do not have the numbers, but I think it is a safe bet that these state and local tax burdens are higher than they were for the previous recessions you mentioned.

WashJeff on August 24, 2011 at 11:48 AM

Garbage In, Garbage Out

Naturally Curly on August 24, 2011 at 11:50 AM

Someone should advise the CBO what happens when you ASSUME something.

GarandFan on August 24, 2011 at 11:52 AM

Your numbers do not even take into account eh state and local tax burden. I do not have the numbers, but I think it is a safe bet that these state and local tax burdens are higher than they were for the previous recessions you mentioned.

WashJeff on August 24, 2011 at 11:48 AM

Via Heritage (from a 2007 report), you would be correct.

Steve Eggleston on August 24, 2011 at 11:57 AM

The first point, the Bush-era tax rate schedules, will be a hard-fought battle in 2012, especially if the economy still hasn’t started producing jobs.

And if we have started producing jobs…TIME TO RAISE TAXES! Huh? Buy into memes much?

winston on August 24, 2011 at 11:58 AM

Because you need to laugh out loud

I wonder who rolled up his pant leg to keep it from getting entangled in a bike chain? Valerie the Iranian Jarrett?

Key West Reader on August 24, 2011 at 11:59 AM

This means we won’t need a killer earthquake to lead us into recovery. WE ARE SAVED!!!! YAY!!!!

Lily on August 24, 2011 at 11:59 AM

The CBO estimates that the US economy will finish this year at a 2.3% GDP growth rate for 2011, a neat trick for an economy that has grown at 0.8% in its first two quarters, and at 2.7% in 2012.

2012? Ed predicts the future! :)

Weebork on August 24, 2011 at 11:59 AM

I know this is off topic (sort of) but if I owned a gas station I would put a break down of where each penny of the price of a gallon on gas goes on every pump. I don’t think the public realizes all of the taxes they pay.

Cindy Munford on August 24, 2011 at 11:59 AM

I bet we could power the economy with Marine farts.

fossten on August 24, 2011 at 12:05 PM

Cindy Munford on August 24, 2011 at 11:59 AM

There is a gas station company in CA called ARCO. They have stickers on all of their pumps that break down how much state and federal taxes are in every gallon, though they don’t break it down farther than that.

Weebork on August 24, 2011 at 12:07 PM

Paul Krugman’s War of the Worlds economics

Good one, Ed. Ride that pony. It may be the new voodoo economics.

petefrt on August 24, 2011 at 12:08 PM

I know this is off topic (sort of) but if I owned a gas station I would put a break down of where each penny of the price of a gallon on gas goes on every pump. I don’t think the public realizes all of the taxes they pay.

Cindy Munford on August 24, 2011 at 11:59 AM

This was done in south Chicagland and IN about 5 or so years ago for about a month, but then it stopped. My guess is that those gas stations no longer passed their annual state weights and measurement insepctions (to get those license stickers on the pumps).

WashJeff on August 24, 2011 at 12:10 PM

Your car will soon run on ground up unicorns …

tarpon on August 24, 2011 at 12:16 PM

WashJeff on August 24, 2011 at 12:10 PM

Was there any public reaction? There is probably some EPA regulation against it. Maybe the constant change in gas prices made it to costly to change but I would figure it out.

Cindy Munford on August 24, 2011 at 12:16 PM

Love the picture — perfectly represents this administration.

KS Rex on August 24, 2011 at 12:17 PM

GIGO

RadClown on August 24, 2011 at 12:17 PM

Weebork on August 24, 2011 at 12:07 PM

I wonder if the taxes are the largest part of the overall cost? I have heard that these folks can’t survive on gas sales alone.

Cindy Munford on August 24, 2011 at 12:20 PM

Was there any public reaction? There is probably some EPA regulation against it. Maybe the constant change in gas prices made it to costly to change but I would figure it out.

Cindy Munford on August 24, 2011 at 12:16 PM

The changing price would be a pain in the arse, but with almost all pumps having digital display, the numbers can be displayed there, and on the receipt (e.g., You paid $4 in federal sales tax and $5 in state sales tax with this fill-up). Unfortunately, the business would still be tweeking a government that controls the business licensing process. As a business owner, tweeking government is not high on my to-do list…especially in Cook County.

WashJeff on August 24, 2011 at 12:24 PM

The first point, the Bush-era tax rate schedules, will be a hard-fought battle in 2012, especially if the economy still hasn’t started producing jobs.

Uhm, HELLO! knock! knock! Any body in there???

Republicans traded away the Bush tax cuts in the budget deal. Anybody remember that?

Debt Ceiling Deal: The Devil Is In The Details
Here’s how it works: Part of the deficit reduction estimates used to sell this deal to the Republicans count on Congressional Budget Office estimates. Those estimates set a baseline. All reductions have to come from that baseline and if any additional spending is to be made, offsetting cuts must also be enacted.

Here’s where it gets interesting. The CBO baseline already assumes that the Bush Era tax cuts will expire at the end of 2012. The spending levels for 2013 include the additional revenue from those cuts expiring. If Republicans want to extend those tax cuts (which are considered spending), they will have to make cuts to the budget to offset every penny. They won’t have the political control needed to do that before the end of 2012, even if the President loses his office and they take control of the Senate, as the cuts expire in 2012, and a new administration and Congress would not be seated until January 2013.

So, unless Republicans want to try to pass an extension along with offsetting cuts during an election year, those cuts will expire. Senate Majority Leader Harry Reid has already said he will not allow the issue to come to a vote, and the President has vowed he will veto it. So if Republicans want to extend those cuts, they will have to come up with $4T in spending cuts to offset the tax cuts. To make it more difficult still, the deal makes it clear that those cuts must come in a 50/50 ratio between defense and non-defense spending, with Social Security, Medicaid, unemployment insurance, civilian and military retirement off the table. Medicare cuts would only come from the provider side, not the individual.

Now, take that in for a minute. If Republicans want to extend the tax cuts, they will need to cut an equal amount out of spending, with half of that coming from defense spending. Half. This is in addition to the $350B that are already being cut as part of this deal. To get their tax cuts, Republicans would have to slash another $2T from defense spending. They would have to justify slashing the defense budget for the benefit of the wealthiest Americans. And with all the social programs off the table, where will they find the other $2T?

What are the odds of that happening? 10,000 to 1? Wake up people! This was published more than a day before the vote. Republicans already agreed to a 4 Trillion dollar tax increase, but didn’t have the honesty to admit it.

There will be no “hard-fought battle” over this in 2012. There will be no battle at all, just a little posturing for the delusional base.

elfman on August 24, 2011 at 12:27 PM

The progs are still trying to stand in that bucket and lift themselves up…

Freelancer on August 24, 2011 at 12:29 PM

Weebork on August 24, 2011 at 12:07 PM

Some other oil companies post the tax breakdowns as well. The reason for the ambiguous seeming entries that say this or that tax is variable, instead of giving a specific amount per gallon, is that the state sales tax and other items are at a percentage of the price. Since the price is so volatile, and indeed from county to county the taxes are variable, they don’t bother printing up all the different stickers they would need. But the point remains a good one. The last time I did a bottom-level analysis, the government was getting 17 times as much money per gallon of gas in my county than the gas station. The normal rate a station pays gives them room to make about $.07 per gallon, and the total taxes per gallon were over $1.20. The oil company itself is barely getting more than $.25 per gallon, depending on the state and the current price of crude.

There’s the cuplrits for you progs, not “big oil”.

Freelancer on August 24, 2011 at 12:35 PM

In other words, the view from Fantasyland looks pretty darned good.

heh

cmsinaz on August 24, 2011 at 12:53 PM

We need to require the CBO to use GAAP, or something else which is compatible with the real world.

Projections based on fantasy are less than useless.

landlines on August 24, 2011 at 1:06 PM

WashJeff on August 24, 2011 at 12:24 PM

That’s a nice business you have there, it would be a shame if something happened to it. You have to love the government.

Cindy Munford on August 24, 2011 at 1:10 PM

What are the odds of that happening? 10,000 to 1? Wake up people! This was published more than a day before the vote. Republicans already agreed to a 4 Trillion dollar tax increase, but didn’t have the honesty to admit it.

There will be no “hard-fought battle” over this in 2012. There will be no battle at all, just a little posturing for the delusional base.

elfman on August 24, 2011 at 12:27 PM

While the author is correct in stating that CBO must assume the expiration of the Bush tax cuts and that they score cuts as spending, he is wrong in stating that this somehow prohibits an extension of those tax cuts during 2012. CBO does not have a rule stating that tax cuts must be offset by spending cuts.

youngTXcon on August 24, 2011 at 1:12 PM

C ondoning
B arack
O bama

Steve Z on August 24, 2011 at 1:19 PM

I don’t think the CBO is fudging their data, but the rules they use to analyze the budget are set by Congress, so they have zero discretion to throw out rules that don’t make sense. The good news is that, without that discretion, they can’t be pressured politically to change their evaluation. The bad news is, since they’re a fixed target, Congress can play games with the inputs to their calculations to make the outcomes change. In an ideal world, the CBO would constantly self-evaluate their predictions against what actually happened and adjust their evaluation algorithms appropriately to get the most accurate results. But that kind of flexibility is exactly what Democrats love to manipulate to corrupt the system in their favor.

Socratease on August 24, 2011 at 1:27 PM

I don’t think the CBO is fudging their data, but the rules they use to analyze the budget are set by Congress, so they have zero discretion to throw out rules that don’t make sense. The good news is that, without that discretion, they can’t be pressured politically to change their evaluation. The bad news is, since they’re a fixed target, Congress can play games with the inputs to their calculations to make the outcomes change. In an ideal world, the CBO would constantly self-evaluate their predictions against what actually happened and adjust their evaluation algorithms appropriately to get the most accurate results. But that kind of flexibility is exactly what Democrats love to manipulate to corrupt the system in their favor.

Socratease on August 24, 2011 at 1:27 PM

Indeed.

youngTXcon on August 24, 2011 at 1:35 PM

If hundreds of thousands of tons of gold fall from the sky and are collected by the government, we *could* pay off our debt! – CBO

Merovign on August 24, 2011 at 3:39 PM

Only Congress is dumb enough to believe any of the crap CBO publishes.

David in ATL on August 24, 2011 at 4:28 PM

Trust but verify. Goes for the CBO , our enemies, and our allies.

CW on August 24, 2011 at 7:57 PM

The first point, the Bush-era tax rate schedules, will be a hard-fought battle in 2012.

Wrong Ed. Bush’s tax cuts were traded away in the Debt Ceiling Deal: The Devil Is In The Details.

elfman on April 7, 2012 at 3:03 PM