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CBO Finds President’s Policies Would Reduce Program Spending Compared to CBO’s Baseline

Many media reports on last week’s Congressional Budget Office analysis of the President’s budget have noted CBO’s estimate that the budget would produce deficits that are $2.7 trillion larger over the next ten years than would occur under CBO’s “baseline.”  (The baseline essentially assumes no change in current law governing taxes and mandatory spending and projects future discretionary appropriations at the same level as provided this year, adjusted for inflation.)  However, these reports often failed to explain that deficits would be higher not because the President proposes big increases in government programs, but because he proposes big tax cuts.

In fact, spending for all programs (separate from interest on the national debt) would be $100 billion lower under the President’s policies than under CBO’s baseline.

Under current law, the big tax cuts enacted in 2001 and 2003 and relief from the alternative minimum tax are scheduled to expire at the end of 2012.  The President proposes to allow the tax cuts for those with incomes above $200,000 ($250,000 for joint filers) to expire but to extend the tax cuts for taxpayers with incomes below those levels.  (He also proposes other changes in law that would have smaller effects on revenues.)  CBO and the Congressional Joint Committee on Taxation estimate that the President’s tax proposals would reduce revenues by $2.3 trillion over the next ten years, compared to what would happen if current law remains unchanged and all of the tax cuts expire on schedule.

While CBO estimates that spending would be $400 billion higher under the President’s policies than under its baseline, that increase, too, reflects the impact of the President’s tax policies.  His proposed tax cuts would increase deficits — and the borrowing to finance them — above CBO’s baseline levels.  That would increase the amount spent on interest on the national debt by more than $500 billion over ten years.

As CBO puts it, the increase in spending “can be more than explained by an increase of $519 billion in interest costs, largely stemming from the additional borrowing that would result from the President’s revenue proposals.”