Baseline Budget Projections: A Discussion of Issues

Baseline Budget Projections: A Discussion of Issues

Order Code RL31414
Baseline Budget Projections:
A Discussion of Issues
Updated February 7, 2008
Marc Labonte
Specialist in Macroeconomics
Government and Finance Division

Baseline Budget Projections: A Discussion of Issues
Summary
In January 2001, the Congressional Budget Office (CBO) projected budget
surpluses of $2.6 trillion from 2002-2007. Instead, deficits over that time combined
to equal $1.7 trillion. Although large by historical standards, this dramatic revision
in surplus projections should not come as a surprise. Baselines are meant to project
the future budgetary path of current policy; they are not meant to be a “best guess”
of future budgetary outcomes. Without a baseline projection, policymakers would
be in the dark when planning the budget. Nevertheless, an overriding focus on the
baseline projection will lead to conclusions that can be radically misleading for three
reasons.
First, baseline projections are only as accurate as the assumptions underlying
them. Arguably, a “better guess” of the probable path of the budget under current
policy might be achieved by modifying three assumptions in the CBO baseline. One,
that discretionary spending will remain constant as a share of GDP rather than
growing at the rate of inflation. Two, that current troop levels will be maintained
abroad in 2007. Three, that recent tax reductions and relief from the alternative
minimum tax (AMT) will not be allowed to expire. Modifying these baseline
assumptions (and accounting for the additional debt service required to finance these
policies) yield an estimate that federal budget deficits would be $7 trillion more over
FY2009 through FY2018 period than that shown by the baseline projection. While
the baseline shows the budget returning to surplus by 2012, the budget remains in
deficit throughout the 10-year budget window if these alternative assumptions are
used instead. The effects of the alternative assumptions grow over time: by 2018, the
alternative baseline deficit is $1 trillion, compared to a baseline surplus of $223
billion.
Second, budget baseline estimates and projections are highly sensitive to small
changes in underlying assumptions and economic factors. Economic forecasts
remain subject to extremely large margins of error, even over short time periods.
Thinking of the baseline projection as a certain outcome distorts the policymaking
process. Although the baseline predicts the budget would return to surplus by 2012
under current law, projection uncertainty means that there is a 42% chance it will still
be in deficit that year.
Third, baseline projections are limited to a 10-year period, and thus give no
indication of the unique situation the United States faces beyond that horizon: the
retirement of the baby boomers. Under current policy, their retirement and rising
medical costs are likely to place an unsustainable strain on government finances.
This report will be updated annually.

Contents
What Baselines Can Do . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
What Baselines Cannot Do . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Discretionary Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Supplemental Spending on Military Operations and Disasters . . . . . . . . . . . 5
Expiring Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Alternative Minimum Tax (AMT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Accuracy of Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Troubles on the Horizon — Social Security, Medicare, and Medicaid . . . . . 9
Conclusion: The Sensitivity of the Baseline to Alternative Assumptions . . . . . 11
List of Figures
Figure 1. Discretionary Spending as a % of GDP, 1962-2007 . . . . . . . . . . . . . . . 4
List of Tables
Table 1. Probability Distribution of Deficit Outcomes Based on Historical
Projection Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 2. Long-Term Projected Federal Outlays, as a % of GDP . . . . . . . . . . . . 10
Table 4. Baseline Deficit Under Alternative Assumptions . . . . . . . . . . . . . . . . . 12

Baseline Budget Projections:
A Discussion of Issues
In January 2001, the Congressional Budget Office (CBO) projected budget
surpluses of $2.6 trillion from 2002-2007. Instead, deficits over that time combined
to equal $1.7 trillion. For the current 2009-2018 budget window, CBO projects a
cumulative 10-year surplus of $0.3 trillion, with the budget returning to surplus in
2012.1 But will actual deficits in the future turn out as differently from this
projection as was the case in the last five years? What lessons can be drawn from
this turn of events, and what role should budget projections play in policy decisions?
What Baselines Can Do
Both CBO and the Office of Management and Budget (OMB) produce baseline
projections of the budget semi-annually. The purpose of the baseline is to project
revenues and outlays under current policy over the next 10 years. A concise
definition of the baseline comes from CBO:
The baseline is intended to provide a neutral, nonjudgmental foundation for
assessing policy options. It is not “realistic,” because tax and spending policies
will change over time. Neither is it intended to be a forecast of future budgetary
outcomes. Rather, the projections ... reflect CBO’s best judgment about how the
economy and other factors will affect federal revenues and spending under
existing policies.2
Thus, headlines such as “CBO baseline predicts that the budget will be balanced by
2012” or “Changes in the baseline projections prove policy change was unaffordable”
are a misuse of the baseline. As indicated in the CBO quote, the baseline is not a
“best guess” of future policy outcomes.
The proper way to use a baseline is as a rule-of-thumb estimate for the
budgetary ramifications of current policy. This offers the policymaker a means to
measure the relative effects of proposed legislation in the context of the overall
budget. Current policy is very narrowly defined in these projections. It does not
1 Congressional Budget Office, The Budget and Economic Outlook, January 2001-January
2008. Similar projections were made by the administration in Office of Management and
Budget, Budget of the United States Government, FY2002-FY2009. All estimates come
from these documents unless otherwise noted. The figures cited in this report have not been
revised to take into account policy changes made since January 2007.
2 CBO, The Budget and Economic Outlook, January 2001, p. 7. Instructions for creating the
baseline estimates are contained in the Budget Enforcement Act (BEA) as amended.

CRS-2
include proposals made in adopted budget resolutions, bills passed by only one
chamber, or even bills passed by both chambers but not yet signed into law.
What Baselines Cannot Do
Without a baseline projection, policymakers would be in the dark when planning
the budget. Nevertheless, an overriding focus on the baseline projection can lead to
radically misleading conclusions. This is true for three reasons.
First, baseline projections are only as accurate as the assumptions underlying
them. Critics have argued that several of the underlying assumptions or rules
followed by CBO and OMB in making the budget baselines are not as realistic as
they could be. Applying alternative assumptions to the baseline could significantly
increase the projected size of the deficit. As discussed more fully below, the baseline
treatment of discretionary spending, supplemental spending on military operations
in Iraq and Afghanistan, expiring tax provisions, and the alternative minimum tax are
four assumptions that have been criticized.
Second, budget estimates and projections are highly sensitive to relatively small
changes in the underlying assumptions and economic factors. These changes can
have substantial effects on the deficit projection, and the effect on the projection
compounds when extrapolated into the future. In particular, our understanding of the
economy remains limited and economic forecasts remain subject to extremely large
margins of error, even over short time periods. Thinking of the baseline projection
as a certain outcome can distort the policymaking process.
Third, baseline projections are limited to current-year expenditures (for 10
years). Although one would expect 10 years to be a more than adequate time horizon
to assess the course of future policy, the United States faces a unique situation
beyond that horizon: the retirement of the baby boomers. Under current policy, their
retirement, coupled with rising medical costs, would lead to a large expansion in
funds dedicated to Social Security and Medicare that is likely to place an
unsustainable strain on government finances. Because their retirement will mostly
occur outside the 10-year window, the baseline does not reflect this problem. In a
narrow sense, it should not reflect the problem, for the baseline is not supposed to
advocate policy changes. Nevertheless, to the extent that the baseline frames the
budget debate, critics argue that a baseline that makes unsustainable policy appear
sustainable is misleading.
All three of these issues are discussed in detail below.
Discretionary Spending
Discretionary spending presents a special problem to budget estimators.
Accounting for about one-third of total outlays, it includes most spending in policy
areas such as the military, transportation, education, and the environment. Unlike
entitlements, there are few legal determinants of its levels; instead it is determined
annually at the “discretion” of legislators. Because almost all discretionary funding

CRS-3
comes through annual appropriations, Congress has significant control over the
amounts involved and there is no easy way to distinguish between “new policies” and
the extension of “current policy.” This means that there is no obvious growth rate
of discretionary spending to use in baseline budget forecasts. Arguably, the most
useful rate of baseline discretionary growth for policymakers is whatever rate is most
realistic.
Although the Budget Enforcement Act (BEA) as amended requires that OMB
and CBO assume discretionary spending will stay constant in inflation-adjusted terms
in their respective baselines, such an adjustment is not the only reasonable one. For
example, assuming discretionary spending grew at an average historical rate,
remained constant on a per-person inflation-adjusted basis, or remained constant as
a percentage of GDP would each produce different budget results for total
discretionary spending, total outlays, and the deficit than does the inflation-
adjustment requirement. A smaller rate of increase would slow overall outlay
growth, reducing the size of future deficit projections. A higher rate of increase
would speed total outlay growth, increasing future deficit projections.
The baseline assumption that overall discretionary spending will stay constant
in real, or inflation adjusted, terms has two implications. First, although
discretionary spending is assumed to keep up with inflation, there is no adjustment
for expected population growth. Under the baseline, therefore, future discretionary
spending can buy the same amount of roads or military equipment or government
services, but there will be fewer of them per person.
Second, since the economy, as measured by gross domestic product (GDP), is
assumed to grow in real terms over the next 10 years, but real discretionary spending
is assumed to remain constant, discretionary spending would fall as a percentage of
GDP. This implies that as society becomes wealthier, it will not want to spend any
of its additional wealth on government-provided discretionary goods and services.
Although there are undoubtedly some government-provided goods and services on
which people may not wish to spend their additional wealth, it is not obvious why
this would be true of total discretionary spending, as implied by the baseline.
Over 10 years, the alternate assumption that non-supplemental discretionary
spending stays constant as a percentage of GDP would increase cumulative outlays
by $1.4 trillion over the baseline levels. (Supplemental spending will be discussed
in the next section.) If outlays are increased then, absent other policy changes, there
will be a larger national debt and higher outlay for debt service. In addition to raising
discretionary outlays by $1.4 trillion, assuming discretionary spending stays constant
as a share of GDP increases debt service costs by $0.2 trillion. The cost of this
alternative assumption grows over time — in 2018, it adds $280 billion (plus $70
billion in debt service) to the deficit. Assuming higher rates of discretionary
spending growth is not inconsistent with the baseline’s purpose, to project current
policy.
The baseline is not meant to make value judgments about, say, what future rate
of discretionary spending growth is most desirable. Its goal is to make the most
accurate projections of current policy. One way to determine what assumption is
most accurate is by looking at what has happened to discretionary spending growth

CRS-4
historically.3 As seen in Figure 1, total discretionary spending has, in fact, fallen
slowly as a percentage of GDP for decades. Much of the decline in the 1990s came
from a decline in military spending as a result of the “peace dividend” following the
end of the cold war. Non-defense discretionary spending rose slightly as a percentage
of GDP in the 1970s, fell in the early 1980s, then stayed relatively constant through
the 1990s. From 2001 to 2005, defense spending grew faster than GDP. Since then,
it has held approximately steady as a share of GDP. From 2001 to 2003, non-defense
discretionary spending grew faster than GDP. Since then, it has held approximately
steady as a share of GDP. (Discretionary spending was lower than originally planned
in FY2007 because of the decision to operate on a continuing resolution for the entire
year.)
Figure 1. Discretionary Spending as a % of GDP, 1962-2007
15
P
D
10
f G
5
% o
0
62
66
78
82
86
90
94
02
06
19
19
1970 1974 19
19
19
19
19
1998 20
20
Non-Defense Discretionary
Defense
Source: CBO.
Although discretionary spending fell as a percentage of GDP, it grew more
quickly than the rate of inflation in all but one year between FY1975 and FY1989.
Thus, using the baseline assumption would have underestimated discretionary
spending throughout this period. In the 1990s, discretionary spending fell in real
terms from FY1990 to FY1995, but then grew more quickly than the rate of inflation
from FY1996 to the present. Removing the fall in defense spending, non-defense
discretionary spending grew more quickly than inflation throughout the 1990s and
2000s, with the exception of 1996.
At least for non-defense discretionary spending, assuming spending would stay
constant as a percentage of GDP is the only assumption that would not consistently
underpredict spending levels historically. For better or worse, the baseline
3 Of course, some of the historical change in discretionary spending is due to policy changes,
which would not be reflected in a baseline. But for discretionary spending, there is no
objective way to disentangle the policy changes from the policy already in place.

CRS-5
assumption that discretionary spending will stay constant in inflation-adjusted terms
through FY2018 would reduce total discretionary spending as a share of GDP to its
lowest level ever since data has been collected.
Supplemental Spending on Military Operations and Disasters
Supplemental discretionary spending, which includes military activities in Iraq
and Afghanistan and natural disaster relief, outside of the normal appropriation
process poses a particular problem for the baseline. The baseline extends whatever
budget authority was granted for the current fiscal year at the time the baseline was
projected and adjusts it for inflation over the next 10 years.4 Supplemental spending
for the current year that is passed after the baseline is released will not be included
in the baseline. As of January 2008, Congress had authorized $88 billion for
supplemental spending in Iraq and Afghanistan,5 which has been included (adjusted
for inflation) in each year of the 10-year baseline.
It is difficult to say what assumption about supplemental spending best
represents current policy for baseline purposes. On the one hand, the baseline
underestimates military spending in FY2008 unless troop levels abroad are
dramatically reduced immediately; CBO estimates that at least $30 billion more is
expected to be spent before FY2008 ends, which will increase the deficit relative to
the baseline. On the other hand, assuming that the government will continue to spend
$115 billion a year in real terms for the next 10 years is probably an overestimate,
although including anything less could reasonably be defined as a policy change in
the baseline context. (Remember, the baseline is not meant to be a best guess of the
future.)
If the $30 billion is added to the baseline in 2008 and extended (adjusted for
inflation) throughout the 10-year projection, then spending over 10 years would rise
by $332 billion (plus $103 billion in debt service). This assumption is not current
policy in the sense that it would still not be sufficient funding to maintain current
troop levels over 10 years. Alternatively, if troops were gradually reduced to 30,000
by 2010, the deficit would be reduced by $305 billion (plus $35 billion in debt
service) over 10 years.
Besides military spending, Congress routinely authorizes unplanned
supplemental spending in response to emergencies. In some years, such as 2005
(following Hurricane Katrina), supplemental spending is quite large; in other years,
it is much smaller. The baseline extends whatever level of supplemental spending
occurred in the last year. Because non-military supplemental spending varies from
year to year, in some years extending the current year amount would be too high over
the baseline window, and in others too low.
4 See CBO, The Budget and Economic Outlook, January 2001, p. 9.
5 CBO estimates supplemental outlays of $115 in 2008 based on $88 billion of budget
authority granted in 2008 and unused budget authority from prior fiscal years.

CRS-6
Expiring Provisions
Some government spending and tax provisions, especially tax credits, have
expiration dates. CBO is required to assume in their baseline estimates that all tax
measures (unless earmarked to a trust fund) and small spending programs will expire
as scheduled, since that represents current policy according to the law.6 The baseline
reflects this assumption by increasing revenues when the measure is due to expire,
or reducing outlays when the program is due to expire. But most of these expiring
provisions have proven very durable and are routinely extended. The 10-year cost
of extending these provisions is $438 billion (plus $97 billion in debt service). Some
examples of expiring tax provisions include credits or deductions for fuel cell
vehicles, qualified zone academy bonds, welfare-to-work, medical savings accounts,
research and experimentation, and economic development empowerment zones.7
The routine renewal of minor tax provisions has made the proper baseline
treatment of expiring provisions tricky for years. But baseline treatment of expiring
provisions became particularly difficult after the decision to make the major tax cuts
of 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, P.L.
107-16), and 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003
(JGTRRA, P.L. 108-27), both of which expire in 2010 due to congressional budget
rules. Clearly, expiration of the tax cut was not a goal of its proponents, and there
have already been several proposals to make it permanent, including the President’s
FY2007 budget proposal. Few would say that policy had not changed if tax cuts
received in 2010 disappeared in 2011.
CBO estimates that if EGTRRA and JGTRRA were renewed, the deficit would
rise by $2.3 trillion (plus $0.4 trillion in debt service) over 10 years. Almost all of
the cost comes after 2010, and grows over time. In 2018, making EGTRRA and
JGTRRA permanent would reduce revenues by $344 billion (not including resulting
debt service). These estimates do not include expiring provisions related to the
alternative minimum tax, which, if allowed to expire, would “take back” some of the
tax cuts. The problem for the baseline posed by the AMT is discussed in the next
section.
Alternative Minimum Tax (AMT)
The alternative minimum individual income tax (AMT) is a parallel tax system
that is meant to ensure that all taxpayers accrue at least some minimum tax liability.8
Because of the reduction in regular income tax rates and because the AMT is not
6 Until 2005, OMB made similar assumptions to construct its baseline. In 2005, the baseline
was changed to incorporate certain policy changes, such as extending expiring tax cuts and
not extending “emergency” spending. To compare CBO and OMB baseline estimates, use
the OMB “BEA baseline deficit,” found in OMB, Analytical Perspectives, February 2007.
7 For more information, see CRS Report RL33641, Tax Expenditures: Trends and Critiques,
by Thomas L. Hungerford.
8 For more information, see CRS Report RL30149, The Alternative Minimum Tax for
Individuals, by Gregg Esenwein.

CRS-7
indexed for inflation, more and more people fall under it each year. JGTRRA
increased the AMT exemption and changed its treatment of tax credits temporarily.
In recent years, the changes made in JGTRRA have been extended for one year at a
time, and the changes are currently due to expire at the end of 2008. As a result,
under current law the number of households falling under the AMT would rise from
4 million in 2006 to nearly 50 million in 2016. The baseline assumes that the
JGTRRA changes will be allowed to expire as scheduled. Many critics have argued
that this is not a realistic baseline assumption since the AMT was originally intended
to affect only a few very wealthy individuals.
Alternative scenarios that prevent the number of AMT taxpayers from growing
rapidly would result in significantly larger deficit projections. For example, if the
higher exemption and treatment of tax credits under the AMT that recently expired
were extended and adjusted for inflation, the deficit would increase by an estimated
$724 billion (and increase interest payments by $189 billion) over 10 years.
Critics argue that the interaction of the AMT under current law with the major
tax cuts also misrepresents the cost of current policy. For example, a married couple
with two children claiming the standard deduction and earning $80,000 a year in
2008 will find that about 60% of their EGTRRA/JGTRRA tax cut has been “taken
back” by the AMT.9 Revenue estimates of the recent tax cuts, including the baseline,
assume that this would occur; if they did not, the revenue estimates of the tax cuts
would be much higher. If expiring AMT provisions were extended when all other
expiring tax provisions were made permanent, then the deficit would increase by $1.3
trillion plus debt service costs of $0.3 trillion over 10 years. This is $598 billion
more than the sum of the estimates of the two policy changes in isolation.
Accuracy of Forecasts
The baseline is inherently uncertain because it rests on a number of
unpredictable assumptions about the future. Indeed, it should be viewed not as a
precise estimate, but rather as the midpoint on a continuum of highly uncertain
outcomes. Even in the very near future, uncertainty looms large: between January
and the end of the fiscal year, revisions in economic and technical assumptions
reduced the surplus in 2001 by $72 billion.
Table 1 shows the probability distribution for the deficit based on economic and
technical errors — not policy changes — to historical projections. Three months into
the fiscal year, CBO projects that the baseline deficit would equal 1.5% of GDP in
FY2008. If the economic and technical errors in CBO’s January baseline projection
are equal to the historical average, there is a 25% chance that nine months later the
actual deficit will be above 2.2% of GDP and a 25% chance it will be below 0.8%
of GDP. As the projection moves further into the future, the errors get larger.
Although CBO projects a baseline surplus for 2012, it predicts a 42% chance of a
deficit instead. In 2012, there is a 25% chance that the budget will be back in surplus
equal to 2.4% of GDP under current policy — and a 25% chance that the deficit will
9 CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and
“Take Back” Effects, by Gregg Esenwein.

CRS-8
have grown to 1.4% of GDP, 1.9 percentage points more than the baseline projection.
With margins of error that large, baseline projections, particularly in out years, cannot
be counted on for accuracy, and like other economic projections reaching that far out,
they are not, by themselves, a meaningful basis for policy decisions.
Table 1. Probability Distribution of Deficit Outcomes Based on
Historical Projection Errors
(% of GDP)
2008
2009
2010
2011
2012
25% Chance That Baseline Deficit Will
-2.2
-2.3
-2.9
-2.2
-1.4
Exceed:
Current Baseline Deficit:
-1.5
-1.3
-1.5
-0.7
0.5
25% Chance That Baseline Deficit Will Be
-0.8
-0.3
-0.2
0.8
2.4
Smaller Than (or Surplus Will Exceed):
Probability of a Deficit Under Current
97
83
79
62
42
Policy (%)
Source: CBO, The Budget and Economic Outlook, Jan. 2008; CRS calculations based on CBO, The
Uncertainty of Budget Projections, March 2007.
Note: These projections are based on current policy, as defined by the official baseline.
The historical errors in CBO’s projections stem from two sources: errors in
CBO’s economic forecasts and “technical” errors, which refer to all changes in
budgetary outcomes that cannot be attributed to policy or economic changes. For
example, projections can prove inaccurate because entitlement program participation
rates turn out to be different or taxable income rises faster or slower than projected.
The economic errors imply no shortcoming on the part of CBO; the accuracy of
their forecasts has typically been comparable to private sector forecasters.
Historically, economic forecasts have been particularly inaccurate at spotting turning
points in the business cycle, and the most recent recession was no exception. In
January 2001, CBO, the Administration, the Federal Reserve, and virtually all major
private forecasts predicted growth between 2.0% and 3.1% for the year. In reality,
the economy grew by 0.8%. Many economists are worried that the economy may
enter a recession in 2008. On average, recent recessions have increased the budget
deficit by 1.6% of GDP, absent policy changes. Over the 10-year budget window,
recessions have relatively small effects on the baseline projections, and small changes
in assumptions about growth in the labor force and productivity have large effects.
Since 2001, economic changes to the baseline have been significant only in
2002 and 2003. By contrast, technical changes have been a major factor each year.10
Much of the downward revision in the baseline forecast in 2001 was attributable to
the fact that tax revenues fell even more quickly than CBO predicted given the rate
10 See CRS Report RS22550, The Federal Budget: Sources of the Movement from Surplus
to Deficit, by Marc Labonte.

CRS-9
of economic growth following the recession. For example, the stock market crash
created a larger than expected decline in capital gains revenues. If a policy change
or tax cut cost more in reality than its original “score,” this would also appear as a
technical error.
What does this uncertainty imply for policymaking? It implies that half of the
time policymakers will find themselves with more money than anticipated, half the
time they will find themselves with less. Setting goals such as balancing the budget
or reducing the deficit by half by changing policy according to the amount needed
under the baseline does not ensure they will occur; in fact, the probability that they
will occur is only 50%.
This section has discussed uncertainty caused by technical and economic
factors. There is also policy uncertainty — for example, spending on unanticipated
future wars and natural disasters — which is not budgeted for in baseline projections.
Troubles on the Horizon — Social Security, Medicare,
and Medicaid
Unlike corporations, the government considers only current-year liabilities in
its budget for two reasons. First, it is typically assumed that only the current budget
surplus or deficit affects aggregate demand in the current economy. Second, unlike
corporations, the government has the power to alter its revenue (taxes) or spending
levels as necessary to meet almost any future funding need. Critics have argued that
since the baseline projects the budget for only the next ten years, it is unable to guide
policymakers on longer term policy issues under the current accounting system.
Long-range projections indicate that the government faces very large liabilities in its
Social Security, Medicaid (which covers long-term care), and Medicare programs
beginning in the second decade of this century under current policy. The retirement
of the baby boom generation, rising medical costs, and longer life expectancy will put
enormous pressure on government finances. If the government used accrual-basis
accounting like corporations, then unfunded liabilities would be recorded in the
current year deficit as they were accrued, and current deficit projections would be
much larger.11 To fund these liabilities when they accrue would require large budget
surpluses using today’s cash-flow accounting. One study has placed the
government’s total unfunded liabilities at $71 trillion in present value terms.12
Benefits paid under these “pay as you go” programs are financed through payroll
taxes on current workers. Over the next 30 years, the ratio of workers per beneficiary
is expected to fall from 3.4 to about 2. Table 2 illustrates the projected path of future
government outlays under current policy. In 2000, total spending on Social Security,
11 For a brief explanation, see CRS Report RL33623, Long-Term Measures of Fiscal
Imbalance, by D. Andrew Austin. In testimony before the House Financial Services
Committee on Feb. 12, 2003, Federal Reserve Chairman Alan Greenspan proposed that the
government adopt accrual-basis accounting, like corporations, in order to take into account
the implicit liabilities of the entitlement programs.
12 Jagdeesh Gokhale and Kent Smetters, “Fiscal and Generational Imbalances: An Update,”
Tax Policy and the Economy, vol. 20, National Bureau of Economic Research, 2006, p. 193.

CRS-10
Medicaid, and Medicare equaled 7.4% of GDP. The share of national income
devoted to those programs is projected to double shortly after 2040. The difference
between future spending on these programs and the government’s future tax revenue
is the “unfunded liability” that can only be financed through higher taxes, lower
benefits than promised under current law, or the issuance of debt. The liabilities
cannot be financed solely through debt issuance, however, because the size and
persistence of the shortfall would quickly lead to unsustainably large budget deficits.
As shown in the table, under current revenue policy, total outlays would rise from
20.3% in 2006 to 38.9% in 2080. This large rise occurs under the assumption that
all spending outside Social Security, Medicare, and Medicaid would fall to 6.7% by
2020, its lowest level in the post-war period, and continue to fall to 5.9% of GDP by
2080. Budget deficits would become unsustainably large at some point, probably by
the 2060s. To balance the budget each year under these spending assumptions, taxes
would need to rise continually, to 24.7% of GDP in 2080 from 18.4% of GDP in
2006. Otherwise, already promised benefits could not be paid. Yet there is no hint
of these developments found in the baseline since it occurs beyond the 10-year
window.13
Table 2. Long-Term Projected Federal Outlays, as a % of GDP

Social Security,
Other Spending
Total Outlays
Budget
Fiscal Year
Medicare, and
(Excluding
(Including
Surplus/
Medicaid
Interest)
Interest)
Deficit(-)
2000 (act.)
7.4
8.7
18.4
2.4
2007 (act.)
8.9
9.4
20.0
-1.9
2020
10.4
6.7
18.4
-0.1
2030
13.7
6.4
20.8
-2.5
2040
14.7
6.2
23.5
-5.2
2060
16.8
6.0
29.8
-11.5
2080
18.8
5.9
38.9
-20.6
Source: OMB, Analytical Perspectives of the U.S. Government, FY2008, p. 188.
Note: Table assumes that current revenue stays a constant 18.3% of GDP from 2020 on.
Critics can reasonably argue that although these problems are important, the
baseline is not the proper forum for raising them. A short-term tool cannot
accommodate the evaluation of long-term problems, they argue; longer term forecasts
already in existence are a more appropriate forum for this debate.14 With margins of
error so large even five years ahead, it would arguably be impractical to give, say, 75-
13 For more information, see CRS Report RL32747, Social Security and Medicare: The
Economic Implications of Current Policy, by Marc Labonte.
14 CBO’s long-term forecasts are presented in CBO, Long-Term Budget Outlook, December
2007.

CRS-11
year projections the institutional role in the budget debate that the baseline currently
occupies. And incorporating long-term liabilities into the baseline could be seen as
favoring this issue over other policy issues that people may believe to be equally or
more important, perhaps altering the baseline’s role from one of neutrality to
advocacy. Nevertheless, it can be argued that to the extent that the baseline frames
the budget debate and makes unsustainable policy appear sustainable, it is also
misleading in this case.
Conclusion: The Sensitivity of the Baseline to
Alternative Assumptions
The budget baseline is meant to be a projection of current policy. This gives
lawmakers a means of evaluating how policy proposals affect the budget. The
baseline is not meant to be a prediction of the future. For a baseline to be useful, it
should give as accurate a description of current policy as possible. Unfortunately,
there is no obvious definition of “current policy,” so some arbitrary assumptions must
be made to construct a baseline. Critics have questioned whether some of these
assumptions could be altered to be more realistic.
Arguably, a “better guess” of the probable path of the federal budget under
current policy extended might be achieved by modifying five assumptions in the
CBO baseline. First, that non-supplemental discretionary spending will remain
constant as a share of GDP rather than growing at the rate of inflation. Second, that
supplemental military spending will be increased so that current troop levels in Iraq
and Afghanistan can be maintained in 2008, and (following baseline conventions)
that spending level will be extended throughout the budget window. Third, that
expiring tax provisions (“extenders”) that are routinely extended will not be allowed
to expire in the future. Fourth, that recent tax cuts (EGTRRA and JGTRRA) will be
extended rather than allowed to expire. Fifth, that the alternative minimum tax
(AMT) relief will be extended and adjusted for inflation rather than allowing the
AMT to “take back” most of the income tax cuts. Modifying these baseline
assumptions (and accounting for the additional debt service required to finance these
policies) yield an estimate that the federal budget deficit would equal $6.7 trillion
over FY2009 through FY2018 period rather than the $0.3 trillion surplus projected
in the official baseline. These changes are illustrated in Table 4. The effects of the
alternative assumptions grow over time: by 2018, the alternative baseline deficit is
$1 trillion, compared to an official baseline surplus of $223 billion. (The table is
meant to serve as a technical illustration rather than a recommended alternative. It
indicates, as CBO notes, that the baseline is an inevitably arbitrary yardstick.)

CRS-12
Table 4. Baseline Deficit Under Alternative Assumptions
($ in billions)
Total
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2018
2009-
2018
CBO baseline
-219 -198 -241 -117
87
61
96
117
95
151
223
274
surplus/deficit
Discretionary
0
-9
-33
-64
-95 -125 -154 -184 -214 -246
-280 -1,404
appropriations
constant as % of GDPa
Current troops levels
-30
-31
-32
-33
-33
-34
-34
-35
-35
-35
-36
-332
abroad maintained in
2008
Extend EGTRRA/
0
-3
-6 -147 -254 -281 -292 -304 -316 -329
-344 -2,276
JGTRRA
Other tax extenders
-6
-14
-22
-31
-38
-44
-49
-53
-58
-63
-67
-439
Extend AMTb
-6
-75
-76
-89 -103 -118 -134 -151 -170 -191
-215 -1,322
Debt service
-1
-6
-12
-26
-50
-79 -113 -152 -197 -247
-301 -1,183
Total modifications
-43 -137 -180 -389 -572 -680 -776 -878 -989 -1112 -1243 -6,956
Modified baseline
-262 -335 -421 -506 -485 -619 -680 -761 -894 -961 -1020 -6,682
surplus/deficit
Source: CRS calculations based on CBO data.
Notes: See text for details. Columns may not be additive due to rounding. The table does not include
legislative changes made since January 2007.
a. Supplemental spending is excluded from this category.
b. For the purposes of this table, the cost of extending the AMT includes the interactive effects when
the AMT and tax cuts are extend jointly.
Another conceptual mistake sometimes made in reference to the baseline is to
treat the underlying assumptions as highly predictable. The baseline is the midpoint
in an wide array of possible outcomes. Because our understanding of the demand for
government services, the growth rate of taxable income, and the economy in general
— and causes of the business cycle in particular — is limited, there is a high degree
of uncertainty surrounding these estimates, even over short time intervals. Over
longer time periods, uncertainty grows, which is an argument counseling against
policy changes whose budgetary effect grows over time. Although the baseline
projects that the budget will be back in surplus in 2011, there is a 42% chance it will
remain in deficit that year.
Reasonable changes in baseline assumptions, made in Table 4 suggest that
under current policy the budget deficit will rise rather than fall throughout the 10-year
window. Outside the 10-year window, budget deficits get larger and current policy
becomes unsustainable because of the budgetary pressures associated with the
retirement of the baby boomers. Current deficits exacerbate these pressures.