Alternative Approaches for Reducing Budget Deficits

March 26, 2012

The explosive path of federal debt that CBO projects under what many observers would view as current policies underscores the need for policy changes to put the nation on a sustainable course. In response to a request from House Budget Committee Chairman Paul Ryan, CBO examined a few alternative approaches for preventing deficits from growing in an unsustainable way.

Current Law

Allowing changes that are scheduled under current law to take effect—including the expiration of tax cuts that originally went into effect in 2001 and 2003—is one of many possible approaches for preventing deficits from growing in an unsustainable way. Under that approach, which is the assumption about future policy that underlies CBO’s baseline projections, federal revenues would increase sharply, and federal spending would be restrained somewhat relative to what would occur under current policies; both the revenues and spending of the federal government would be well above their historical averages as a share of GDP. With that combination of revenues and spending, debt follows a sustainable path—reaching 40 percent of GDP by 2050, similar to the average share from 1950 to 2008.

Chairman Ryan's Approaches

CBO examined two other approaches specified by Chairman Ryan: an across-the-board increase in income tax rates and an across-the-board reduction in spending other than that for health care entitlement programs. CBO calculated the increases in taxes and the reductions in spending necessary under the other policies to match the deficit and debt levels under the baseline scenario. The first approach would require revenue increases even greater than those in CBO’s current-law baseline, and the second approach would require very sharp cuts in federal programs apart from the health care entitlements.