For CBO, Current Law Finally Catches Up to Alternatives

Posted February 22, 2013 at 5:05pm

Last year, when lawmakers wanted to plot the possible future course of government spending and taxation, they could look at the Congressional Budget Office’s regular baseline or its alternative fiscal scenario.

And what a difference it would make which one they consulted.

The CBO’s “current law” baseline then showed deficits growing by a projected $2.3 trillion over the next decade. But if lawmakers instead viewed the agency’s alternative scenario, which projects the effects of current policy rather than current law, they would see deficits soaring by almost $10 trillion over the same period, more than four times the amount in the baseline.

In the words of Maya MacGuineas, president of the Committee for a Responsible Federal Budget, the separate projections were “like bookends of two unrealistic scenarios — one the best case, one the worst case.”

But for budget planners, one important consequence of the fiscal-cliff law that passed in January was that the $8 trillion gap in deficit projections in the two scenarios narrowed considerably. There is now just a $2.5 trillion difference between deficits estimated under the new CBO baseline and alternative scenario, issued by the agency earlier this month.

The gap that was closed is a kind of measure of the certainty that the fiscal-cliff law created by taking temporary tax measures that were sharply contested over the past decade and setting them into stone, or at least as much permanence as tax law carries in Washington. The alternative scenario is less important as an optional measure of projected deficits and debt than it was in the last decade, according to some, and so lawmakers have a firmer foundation for projecting the effects of tax and spending measures. There’s common ground in where to start, in other words, even if there’s not much common ground on where to go.

In the past, many viewed the alternative scenario as a more accurate projection than the baseline, since the baseline assumed the wholesale expiration of trillions of dollars in temporary tax cuts enacted in 2001 and 2003 — something few believed would occur.

But in the CBO’s latest budget and economic outlook, the alternative scenario assumes less prominence than in previous reports

The independent congressional agency resists the notion that its baseline or alternative fiscal scenario is meant to forecast government spending, revenue or deficits, which are influenced by the economy. Instead, the CBO describes the baseline as a projection of the fiscal effects of current laws, and one that can be used to measure the effects of proposed policies. The alternative scenario projects the effects of continuing certain policies that have been in place but are scheduled to change under current law.

With the new baseline and alternative scenario in place, it just might be a little easier to guess what spending, taxes, deficits and debt will amount to in the future.

“The new CBO baseline is a much more realistic projection, yes, because the issue of what to do with the expiring tax cuts has now been resolved,” MacGuineas said. “Now, current law is much closer to reality than it was before the end of the year.”

In the past, the baseline and alternative scenario charted very different paths. The baseline assumed all the tax cuts would expire at the end of 2012, reducing the deficit, while the alternative scenario, aware of the political winds, assumed all the tax cuts would be extended, increasing the deficit.

But even after the fiscal-cliff legislation, there is still uncertainty about future tax and spending policy. And while the alternative scenario is not as important as it used to be, it still has its uses.

The latest alternative scenario released Feb. 5 projects deficits and debt under the assumption that Congress repeals the nine-year, $1.2 trillion sequester set to begin Friday, cancels a scheduled reduction in fees paid to physicians who treat Medicare patients and extends more than 70 tax provisions that are set to expire.

Under this scenario, the deficit would grow by $9.5 trillion by 2023. Under the baseline, which assumes that current laws remain in place — meaning the sequester occurs, Medicare reimbursements are cut and the tax provisions expire — the deficit would rise by $7 trillion during the same period.

“It’s still a valuable tool because it is meant to give policymakers and budget analysts another metric by which to measure policy changes and the future projected path of spending, revenue, debt and the economy to some extent,” Shai Akabas, senior policy analyst at the Bipartisan Policy Center, said of the alternative scenario.

MacGuineas said the alternative “still is important to put out there because current law still has too many policies built into it that policymakers are unlikely to enact.”

Nevertheless, some budget observers believe the alternative scenario would be more useful if it adjusted for other spending that is widely expected to fall. The cost of the war in Afghanistan is expected to decline in coming years as U.S. troops return home, but the alternative scenario assumes war spending will continue at current levels. Similarly, the alternative scenario assumes disaster spending will continue at current levels, even though it has been unusually high as a result of Superstorm Sandy.

“That’s a problem,” said Patrick Louis Knudsen, a senior fellow at The Heritage Foundation. Without accounting for the expected fall in war costs in particular, he said, “the alternative fiscal scenario is still misleading.” He said including war and disaster spending that is unlikely to occur allows policymakers to pretend they are cutting spending when they are really just writing off spending that never would have occurred anyway.

“To me it undermines the intent of the alternative scenario, which is presumably to show a more realistic path of spending and revenue than the baseline shows, because of the conventions the baseline is required to use,” Knudsen said.

The CBO has not in the past adjusted its alternative projections for expected declines in war spending, in part because it is difficult to estimate how much it may fall, if indeed it does fall. Even if war spending drops in Afghanistan, it could rise in other parts of the world before the decade ends, some budget experts say.

The CBO estimates the effects of declines in both war spending and disaster relief costs in its report, even though it does not incorporate these estimates into the alternative scenario.

If the number of troops deployed in what are called overseas contingency operations falls to 45,000 by 2015, it would reduce the deficit by $693 billion by 2023, according to the report.

Not continuing disaster relief spending at Sandy levels would save $353 billion over the period. But that assumes, of course, there are no other disasters of similar scale in the next decade.