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CBO Update Report Contains Little News

The Congressional Budget Office’s annual summer update report on the budget and the economy, which it released today, contains little real news:  CBO’s view of the budget and economic outlook remains largely unchanged.

As usual, CBO presents two budget and economic paths:  the budget baseline, which assumes that current laws affecting the budget remain in place, and an alternative fiscal scenario, which assumes that tax provisions (notably President Bush’s 2001 and 2003 income tax cuts), which are due to expire at year-end, continue permanently and that domestic and defense spending cuts, which are due to take effect in early 2013, do not occur.

Under the alternative scenario, projected federal deficits average 5 percent of gross domestic product (GDP) over the next ten years and debt held by the public swells from about 70 percent of GDP today to 90 percent by 2022.  But under the baseline scenario — in which the 2001 and 2003 tax cuts expire and the scheduled spending cuts take place — deficits average only 1 percent of GDP and the debt falls below 60 percent of GDP.

The tax increases and spending cuts scheduled to take effect in January 2013 would significantly reduce the deficit, but they would also weaken the economy in the near term and likely cause a shallow recession in early 2013, as CBO has previously reported.

In the longer run, however, lower deficits would benefit the economy.  By 2022, real gross national product (a measure of U.S. income) would be nearly 2 percent higher in the baseline than in the alternative fiscal scenario.  The challenge facing policymakers is how to develop a balanced budget plan that supports the economic recovery and stabilizes the debt as the economy strengthens.  (See our analysis here.)

In its new report, CBO updates its 10-year budget projections to reflect changes in the economic outlook and other factors.  These changes reduce projected baseline deficits by more than $600 billion over the 2013-2022 period.  Half of the improvement in the budget outlook stems from changes in the economic projections — primarily higher wages and profits that lead to more tax collections, and lower interest rates that reduce debt-service costs.

In 2012, for the third year in a row, CBO expects that Medicare spending will be lower than it previously anticipated, and it has therefore lowered its projections of Medicare spending.

The new projections also incorporate CBO’s previously released estimates of the effects of the recent Supreme Court decision on the health reform law.  The court’s decision essentially means that states can decide whether to expand their Medicaid programs to cover adults with incomes up to 138 percent of the federal poverty level.  Because some states will probably not implement the Medicaid expansion, the federal government will spend less for Medicaid than previously projected.  Some of the people losing potential eligibility for Medicaid would be able to gain coverage through the new health insurance exchanges, increasing the cost of exchange subsidies.  On balance, CBO estimates that the court’s decision has reduced the cost of the coverage expansion, but at the expense of leaving 3 million more people without health insurance.