What America's Budget Looks Like

Posted: Feb 04, 2014 12:17 PM

The Congressional Budget Office's long-term budget update was released today, and there are important updates from its previous projections relating to recent legislative changes. Guy will have more, but there are a few important things to remember:

The CBO's forecasts rely heavily on economic models

Any long-term forecast would be useless if there wasn't a sophisticated economic model behind it. If there's no knowledge of how the economy works, there can be no tax revenue projections, no spending estimates, and no budget estimates. To that end, the CBO projects a notable economic expansion in the next few years:

And they project a continuing drop in labor force participation for a variety of reasons, two of which are an aging labor force (more retirees) and the disincentives to work in Obamacare:

Previous estimates from the CBO have turned out to be overly optimistic when it came to economic forecasting. If these turn out to be overly optimistic, our deficit and debt picture will look much worse.

Federal debt has "stabilized" - at levels we haven't seen since World War II

Slowing health costs and sequestration have combined to slow the tide of red ink - here's what our debt picture looks like:

Deficits that will average 3.5% of GDP over the next ten years will slow the massive debt increases that we've seen in the Obama era. It's not all good news, though - as the Committee for a Responsible Federal Budget points out, this report is worse than the last one in this regard:

"Tax Expenditures" make up a massive amount of the tax code

What the CBO calls "tax expenditures" are controversial - basically, it consists of anything that reduces a tax burden below a statutory rate. Some pundits call this "spending through the tax code," while others say that anything that lets taxpayers keep more of their own money can't be qualified as "spending."

Regardless, the amount of money that taxpayers keep below their statutory tax rates is astounding:

Much public policy recently have focused on these tax expenditures. The Republican ACA-replacement plan, for example, shrinks the employment-based health insurance exclusion in order to pay for other spending. The CBO puts into perspective just how massive some of these exclusions are.

Coverage provisions of Obamacare will reduce demand for employment, but CBO projects that decreased out-of-pocket spending on health will translate to increased out-of-pocket spending on other goods and services

One of the big takeaways - Guy Benson will have more on this - is that CBO lays out the work disincentives in Obamacare. There will be an increase in voluntary unemployment due to Obamacare provisions, but CBO thinks that involuntary unemployment will be unchanged. This is laid out in this paragraph:

There are a lot of assumptions that undergird the CBO's forecast, from economic performance to budget projections to employment incentives in Obamacare. They could be wrong, but policymakers and legislators typically take CBO reports as pretty ironclad. Policy will be made based on this.

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