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Friday, December 23, 2011

A Sustainable Budget Deficit: Overview of Major Expiring Policies in 2011 and 2012 and Their Budgetary Impact

Margot L. Crandall-Hollick
Analyst in Public Finance

The federal government runs a deficit when spending (mandatory, discretionary, and interest payments on the debt) is greater than revenues (taxes and fees). Between 2009 and 2011, deficits relative to the size of the economy (i.e., as a percentage of gross domestic product (GDP)) have been at their highest levels in the post-World War II era. In 2011, the federal deficit was 8.5% of GDP, while from 1946 to 2008, the budget deficit averaged 1.7% of GDP.

Many experts believe that deficits must be reduced to “sustainable” levels in order to avoid a budgetary crisis. Large budget deficits can result in a budgetary crisis for two principal reasons. First, as deficits persist, government incurs debt and as a nation’s debt grows, so too would interest payments on that debt, limiting spending on other parts of the budget. Second, increasing deficits and debt could also trigger fear among creditors about a government’s ability to repay its debts, resulting in an unwillingness by creditors to lend at affordable rates.1

A budget deficit can be “sustainable” if deficits are small enough so that the accumulation of annual deficits—the debt—does not grow faster than GDP. Experts differ on what is the exact size of a sustainable budget deficit, but they generally cite figures below 3% of GDP. The President’s Deficit Reduction Commission produced a proposal that would reduce the deficit to 2.3% of GDP by 2015.2 House Budget Committee Chairman Paul Ryan’s 2012 budget proposal, as analyzed by the Congressional Budget Office (CBO), would lower the deficit to 2% of GDP by 2022.3 Prior CRS analysis estimated that annual budget deficits would need to be no larger than 2.5% to 3.0% of GDP over the next 10 years in order to stabilize the debt as a share of GDP at its projected 2011 level (69% of GDP).4

The federal budget deficit is projected to be at a sustainable level (1.2% of GDP) by 2021 if (1) Congress maintains spending in line with levels set forth by the Budget Control Act5 (BCA) and (2) does not extend several major policies scheduled to expire in 2011 and 2012. Congress may instead choose to extend some or all of these policies. If Congress does extend all of these expiring policies, and they are not offset, the deficit is projected to become unsustainable. Of the expiring policies, extension of the Bush tax cuts would comprise nearly three-quarters of the increase in the deficit.

This report compares the budgetary implication of allowing all the policies to expire versus extending all of them in order to show their impact on the medium-term deficit. In the past, when these policies have been extended, they have generally not been offset. This report assumes that future extensions would also not be offset. This report first examines six major policies that are scheduled to expire in 2011 and 2012 and the deficit implications of their extension. Then the report provides data on the annual and aggregate budget implications of extending these major policies.

Date of Report: December 16, 2011
Number of Pages: 10
Order Number: R42117
Price: $29.95

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