Presentation to the American Association for the Advancement of Science

May 17, 2010

Last week I spoke at the 35th annual Forum on Science and Technology Policy held by the American Association for the Advancement of Science. My presentation on the economic and budget outlook was part of a session on the “budgetary and policy context for research and development.”

I first focused on the economic outlook. Although severe economic downturns often sow the seeds of robust recoveries, CBO expects that the current recovery will be dampened by the continuing fragility of some financial markets and institutions, declining support from fiscal and monetary policy, and a restrained increase in household spending. Therefore, our latest projection envisions a slow economic recovery and a labor market that remains weak for a few years.

I then concentrated on the budget outlook. CBO’s March projection shows that, under current law in 2020, about one-half of federal revenue will come from individual income taxes, about one-third will come from payroll taxes, and the rest will come from taxes on corporate profits and other sources. That projection also showed that roughly three-quarters of spending will go to just five areas—Social Security, Medicare, Medicaid, defense, and net interest—with the remaining one-quarter of spending arising from all other federal programs.

Shares of Federal Spending Projected for 2020 in CBO’s March Baseline
 

If policymakers extended all of the 2001 and 2003 tax cuts, indexed the alternative minimum tax for inflation, and made no other changes to revenues or outlays, budget deficits would stay above 5 percent of gross domestic product (GDP) for most of the next decade. Under this scenario, the budget deficit in 2020 would be nearly $1.4 trillion, and interest payments on the debt that year would be nearly $1 trillion; federal debt would equal roughly 90 percent of GDP and would be rising rapidly. Moving fiscal policy from that unsustainable path to a safe path would require significant changes in spending, revenues, or both.

The Federal Budget in 2020
CBO’s March Projection with Tax Cuts Extended and AMT Indexed

 

The United States faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. Changes of the magnitude required to make fiscal policy sustainable could have important economic and social effects—but they also provide an opportunity to address existing concerns about tax and spending policies. Given the time required to implement significant policy changes, determining those changes is an urgent task for policymakers.