Extending recently approved spending increases and tax cuts would create an “unsustainable” fiscal outlook, the Congressional Budget Office said in a report published Wednesday.
The report described how annual budget deficits could swell next decade if recent tax cut provisions set to expire next decade are extended and if Congress also maintains higher federal funding levels currently set to drop late next year.The figures show the difference between budget forecasts based on current law and current policy. The CBO produces annual estimates for Congress based on current law.But future lawmakers are often inclined to keep existing policies to avoid either sudden spending cuts or tax increases, as they did, for example, with major provisions of the tax cuts approved by President George W. Bush in 2001.
Expiring tax cuts and automatic spending curbs can make such fiscal projections look better than they would otherwise be. The CBO projections of current policy show how annual budget deficits, and the public debt, could worsen if such policies aren’t allowed to expire.The CBO is a nonpartisan agency created by Congress to provide impartial fiscal and economic projections, and its current leader, Keith Hall, was appointed by Republican leaders of the House and Senate in 2015.
Major provisions of the $1.5 trillion tax cut approved by Congress and signed by President Trump expire over the next decade. In addition, a two-year federal funding deal struck earlier this year would lead to a sharp decline in inflation-adjusted government spending if it expires next October without being extended.
The tax cuts expire because of choices Republicans made when they passed their tax law last year without any Democratic votes. They used a fast-track procedure that let them avoid the 60-vote Senate threshold, but it came with the restriction that they couldn’t increase budget deficits beyond a decade.
Individual tax cuts expire after 2025. Certain business tax cuts also expire at various points over the coming decade. For example, a tighter standard on business interest deductions is scheduled to take effect in 2022.
The CBO ran three different scenarios in their report, with each assuming that spending doesn’t decline when the current two-year budget deal expires and that tax rates don’t sharply rise.
The first scenario assumes major provisions of the tax bill affecting individual income taxes don’t expire. Under this scenario, budget deficits rise to 7.1% of gross domestic product in 2028, up from the CBO’s baseline projection of 5.1%, and to 10.5% of GDP by 2038, up from 7.1% in the baseline forecast.
The second scenario is like the first, but it assumes that tax policy is changed so that revenues don’t rise further as a share of GDP after 2028. Here, budget deficits rise to 11.3% of GDP by 2038.
The third scenario assumes that tax policy keeps revenues as a share of GDP flat relative to their current levels. The budget deficit under this scenario rises to 8.1% of GDP in 2028 and 12.9% in 2038.
Under each of the alternative scenarios, interest rates would be slightly higher than would otherwise be the case, and economic output would be slightly lower.
These scenarios would have other negative effects, including by “increasing pressure on the non-interest portions of the budget, limiting lawmakers’ ability to respond to unforeseen events, and increasing the likelihood of a fiscal crisis,” the CBO said. “Those consequences would be especially acute under the scenarios because the debt would be so large and would rise so rapidly.”