The Real Budget Numbers
By Brian Riedl

1) Yes, CBO projects a balanced budget by 2012. However, CBO projections assume:

• Expiration of all Bush tax cuts, as well as other temporary tax cuts;
• The AMT is not fixed;
• No more appropriations for Iraq, Afghanistan, or Katrina-related reconstruction;
• No reconciliation spending reforms; and
• That inflation-adjusted discretionary spending will be frozen.

We fix these assumptions by assuming:

• CBO numbers for extending the tax cuts and fixing the AMT.
• CBO numbers on an Iraq/Afghanistan gradual phase-down.
• CBO numbers for past Katrina spending, as well as our own modest estimates for future appropriations.
• CBO numbers for the reconciliation.
• Defense discretionary outlays (excluding supplemental bills) rising 5% annually.
• Non-defense discretionary outlays (excluding supplemental bills) rising 2% in 2006 and 4% thereafter.

2) Fixing these assumptions leads to budget deficits of:

• $394 billion in 2006
• $412 billion in 2007
• $428 billion in 2008
• $436 billion in 2009
• $458 billion in 2010,
• (Skipping a few years) $805 billion in 2015. At that point it would it take a $6,500 per-household tax increase just to balance the budget.

3) Tax revenues are not the problem:

• Between 2004 and 2006 revenues are projected to rise by an unprecedented $420 billion.
• This 22% revenue jump is the largest 2-year revenue surge since 1976-1978, when high inflation and bracket creep were steeply raising revenues.
• This will bring revenues near the post-war average of just under 18% GDP.

4) Such surging tax revenues cannot keep up with runaway spending, which:

• Surged 8% in 2005, the second-highest growth since 1985.
• Spending will leap 9% in 2006.
• Overall, spending from 2004-2006 will leap $402 billion.
• From 2005-2016, revenues will increase 5% annually, but spending is projected to jump 6% annually.

(These are after correcting the CBO baseline as described above)

5 ) Social Security, Medicare, and Medicaid are out of control:

• In 2005 these 3 programs spent $1,034 billion (8.4% GDP). In 2016 they will spend $2,260 billion (10.8% GDP)
• Medicare will increase by $112 billion (34%) from 2005 through 2007 as the drug benefit begins.
• Over the next decade, Medicare will grow 9% annually, Medicaid 8% annually, and Social Security by 6% annually.
• 2006 will be the first year when Medicare/Medicaid ($582 billion combined) outspend Social Security ($550 billion).

6) Regarding the President’s pledge to halve the deficit by 2009:

• This promise was made when the 2004 projected deficit was $521 billion (4.5% GDP).
• The President pledged a 2009 deficit of 2.25% GDP.
• Note that the actual 2004 budget deficit ended up much lower than that projected figure.
• The President’s pledge currently translates into a 2009 deficit of $343 billion.
• Our 2009 projections show a budget deficit of $436 billion - $93 billion above the target.
• Either way, the 2009 deficit is not the issue. Long-term spending trends from Social Security, Medicare, and Medicaid should be the focus.

Brian Riedl is the Grover M. Hermann Fellow for Federal Budgetary Affairs at The Heritage Foundation.

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