Economics, Pethokoukis

The Cosmo Castorini Theory of Fiscal Analysis — and why that CBO budget forecast is probably a best-case scenario

Credit: CBO

Credit: CBO

The new Congressional Budget Office forecast has the US debt-GDP level more or less stabilizing in the 70% to 80% range over the next decade. But that macro forecast is composed of many microforecasts, outlined below (via the Tax Policy Center):

1. Revenues average almost 19 percent of GDP as projected from 2015 through 2023 (a level higher than revenues in all but 5 years since 1982).

2. Revenues from the personal income tax rise steadily to 9.8 percent of GDP in 2023 (a figured exceeded only once in U.S. history).

3. Defense spending falls to its lowest share of the economy since before WWII.

4. Non-defense discretionary spending falls to its lowest share of the economy since before separate records were kept starting in 1962.

5. Significant reductions in projected health care cost growth pan out as projected.

6. The economy returns to full employment in 2017 as scheduled and remains there without recession through 2023.

Yet despite all those rare budgetary occurrences — many predicated upon rare displays of political will — the nation still would be in poor fiscal shape:

1. Net interest payments will rise from 1.4 percent of GDP in 2012 to 3.3 percent in 2023 (tied for the highest level in history and a sign of approaching fiscal unsustainability).

2. The full-employment deficit would reach 3.8 percent of GDP in 2022 and 2023 (other than in the 2009-12 period, these would be the highest levels except for four of the past 50 years).

3. The debt/GDP ratio would be 77 percent by 2023. The ratio would be more than 20 percentage points higher in every year during the next decade than it was for any year between 1957 and 2007, and it would be more than double the 37 percent level it averaged during the 1957-2007 period.

4. It would take $1.2 trillion in additional budget savings (beyond the sequester) to get the debt/GDP ratio in 2023 down to its 2012 level of 72.5 percent, and it would take a total of $4.4 trillion in adjustments to reduce the debt/GDP ratio in 2023 to 60 percent.

Yet my liberal/progressive/Democrat friends think stabilizing the debt is good enough. In fact, many would like to stabilize it at an higher level. Time for me to again to cite the Cosmo Castorini Theory of Fiscal Analysis:

The medium-term US budget path could well be tolerable — unless something goes wrong …

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