The recent release of the Congressional Budget Office’s ten-year outlook highlights a deteriorating fiscal situation. The CBO baseline now includes deficits for as far as their projections extend with the largest nominal deficit on record occurring in 2009. As depressing as that news may be, the situation could grow much bleaker if difficult decisions are avoided.

The CBO baseline assumes that pay-as-you-go budget rules will not be waived for the extension of expiring tax cuts and Alternative Minimum Tax (AMT) relief. Obviously, complying with paygo for these popular items will be politically difficult, but failing to do so would increase the deficit by $5.1 trillion over ten-years, including added debt service costs. Given the high stakes for our nation’s fiscal and economic future, the presidential candidates as well as Congress should apply paygo as a starting point for their tax and spending proposals.

The Concord Coalition has created a plausible baseline which demonstrates the effect that politically convenient decisions have on our nation’s fiscal future. This baseline includes the extension of all expiring tax cuts, annual AMT inflation-adjusted relief, increases in regular appropriations at the same rate of economic growth, a phase-down of funding for Iraq and Afghanistan, and the debt service assumed from the listed options due to increased borrowing. Without corresponding offsets, these policy options would add $7.8 trillion in deficits over ten-years. This plausible baseline would also see deficits rise from 2.9 percent of GDP to 5.1 percent of GDP and interest on the national debt, the most direct expense of deficits borne by taxpayers, increase from $240 billion this year to $638 billion by 2018.

The reason The Concord Coalition publishes its plausible baseline in combination with the official baseline is not to establish an acceptable standard against which future policy should be measured, but rather to highlight the importance of decisions in the near-term and warn against the dire consequences of failing to change course. However, candidates on the campaign trail have embraced the use of an alternative baseline so that their respective plans are measured against much less favorable projections and by contrast appear to “improve” the fiscal outlook. The political logic behind this is obvious, but measured against current law (i.e., the official CBO baseline) the candidates’ plans would significantly expand the deficit.

Improving our fiscal situation will require compliance with paygo on the important decisions moving forward. Paygo rules are not a mere bookkeeping exercise; they have real world consequences for our economic future. Deficit financing new initiatives would only run up the national debt and its associated interest costs, drain national savings, increase our reliance on foreign lenders and reduce future incomes.

This entry was posted on Friday, September 12th, 2008 at 11:15 am and is filed under Politics .