Earlier this week, the Congressional Budget Office released its Jan. 2012 Budget and Economic Outlook, which showed a sustainable fiscal outlook over the next decade provided Congress leaves the budget on autopilot. The current law baseline—the legislated status quo—depicts the budget deficit averaging only 1.5 percent of GDP over the next decade (fiscal years 2013-22), public debt peaking at 75.1 percent of GDP in FY2013, and the public debt-to-GDP ratio gradually falling to a more-than-sustainable 62.0 percent of GDP by FY2022. This picture is not perfect—the fiscal drag from the debt ceiling deal and expiring tax provisions is projected to slow growth to an anemic 1.1 percent of GDP in 2013 (and unemployment projections were raised half a percentage point across the decade)—but it is certainly fiscally sustainable in the out years, after the economy has recovered.
And the single biggest policy threat to this sustainable fiscal outlook? Congress might extend all the George W. Bush-era tax cuts over the next decade, to the tune of $4.4 trillion over a decade. That’s $3.8 trillion (-9.1 percent) in revenue loss and $657 billion (+15.5 percent) in additional debt service. Yes, deficit-financed tax cuts increase spending. CBO’s current law baseline projects cumulative budget deficits of $3.1 trillion, so continuing the Bush-era tax cuts would more than double the scope of fiscal stress. (These calculations assume that Congress will continue patching the alternative minimum tax and attribute a $1.1 trillion interaction between the policies to the Bush tax cuts, which pushed more households into the AMT, significantly increasing the cost of the AMT patch.) Measured differently, the hefty opportunity cost of the Bush-era tax cuts averages 1.9 percent of GDP in revenue loss and another 0.3 percent of GDP in increased interest spending over 10 years.
Under current law, the budget will begin running sustained primary surpluses (where revenue exceeds non-interest spending) starting in FY2015. If Congress patches the AMT, primary surpluses begin in 2017. If the Bush tax cuts are extended, the budget never reaches primary balance. (Primary balance is a common metric for sustainability: while it does not necessarily stabilize debt as a share of GDP—which depends on interest rates, outstanding debt levels, and GDP growth—it’s a decent approximation.)
The Bush tax cuts remain expensive, ineffective, and unfair, and permanently extending even a portion of them—which President Obama proposes to do for 98 percent of households—makes it difficult to adequately fund public investments, economic security programs, and national security spending. Congress and the public have to accept that the federal government must either collect significantly more revenue (above that projected under current law) or renege on commitments insuring that seniors, the poor, and the disabled are provided with health care and a degree of retirement security. Like it or not, we can’t afford the New Deal, the Great Society, and the Bush tax cuts.