Sunday, February 10, 2013

Assume Everything Goes Your Way...

That's more or less my take on the current projections offered by the CBO.  To summarize and build on the work of William Gale

They assume:

1.  The economy reaches full employment/output by 2017 and stays there through 2023.  This both assumes rapid growth between now and 2017 and no recession or crisis between 2017 and 2023.  The budget outlook would markedly deteriorate were this not the case.

2.  Inflation remains low and (therefore) interest rates remain modest.  They CBO does assume a rapid climb in the real interest rate closer to historical levels (about 3%).  This would be welcome relief for savers but is consistent with the economic performance they are expecting.

3.  The savings in the BCA (the caps through 2023) hold, driving both defense and non defense discretionary levels to their lowest levels as a share of GDP since 1940 and 1962 (when tracking was started) respectively.  While, in my view, feasible and desirable, this is vanishingly unlikely.

4.  Health care inflation remains tame.  The CBO grandfathers recent trends in health care inflation into their forecast.  That's certainly possible but again it's an optimistic assumption given long term trends.

5.  The picture on the ACA does not deteriorate further and certain long term assumptions hold.  Among the assumptions in the ACA are the cadillac tax, the number of people in the exchanges, and the reduction in exchange subsidies beginning, I believe, in 2018.  Again, these are all optimistic assumptions.

And under these scenarios, the budget picture remains basically unchanged.  The debt to GDP ratio at the end of the period is slightly higher than it was in 2012.  The deficit is above 3 percent of GDP and nearly back to a trillion dollars.

I spend most of my time in business.  If you're presented with a plan that assumes everything has to break your way in order for you to move sideways, you know you are in trouble.  We are definitely (still) in trouble, despite about a 1 percent of GDP increase in tax receipts (between the ATRA and the end of the payroll tax holiday).

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