BACKGROUNDER:
HIGHLIGHTS OF CBO'S JANUARY '07 ANNUAL REPORT

CBO: The Budget and Economic Outlook, Fiscal Years 2008 to 2017

Unrealistic budget rules lead CBO to project budget surplus by 2012 : The official CBO baseline projects small deficits in the next few years and a balanced budget by 2012. However , it is key to realize that CBO's hands are effectively tied by unrealistic budget scoring rules that assume:

1. Unrealistically low spending on the Iraq war because CBO's defense spending projections are based on FY 07 defense funding levels enacted last fall (the bill included only $70 billion for the Iraq war, while an additional $100 billion supplemental request is expected this spring);

2. No increase in the size of the Armed Forces (a proposal that already has broad bipartisan support);

3. No realistic set aside for natural disasters; and

4. No relief from the Alternative Minimum Tax which is, at a rapidly growing pace, automatically imposing higher taxes on middle income wage earners.

In addition, the CBO baseline assumes expiration of the Bush tax cuts. Were CBO to include more realistic assumptions in its baseline projections, the short-term picture would look very different. As noted above, the projected cumulative budget surplus of $800 billion over the next 10 years, would change to a deficit of $4.2 trillion.

Projects an FY 2007 budget deficit of $172 billion (although excluding the Social Security surpluses that tend to "mask" the deficit, the budget shortfall increases to $357 billion).

Long-term budget outlook : "The aging of the population and continuing increases in health care costs are expected to put considerable pressure on the budget in coming decades. Economic growth alone is unlikely to be sufficient to alleviate that pressure as Medicare, Medicaid, and (to a lesser extent) Social Security require even greater resources under current law. Either a substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of the spending and revenue changes will be necessary to promote the nation's long-term fiscal stability."

Projects an economic slowdown in calendar year 2007 but a pick up in 2008 . Specifically, CBO projects that "GDP will grow by 2.3 percent in real terms in 2007, a full percentage point less than the growth recorded last year." CBO attributes this to the Fed's increase in interest rates and the decline in housing construction. However, for 2008 CBO projects a rebound to 3.0 percent with exports remaining strong.

Inflation to ease : CBO projects that inflation will ease slightly this year, falling from last year's rate of 2.8 percent to 1.7 percent in 2007 because of a large drop in fuel prices.

Short-term interest rates : 3-month T-bills to "drop slightly this year from the 4.9 percent rate seen at the end of 2006" with further declines anticipated in 2008 when the rate is projected to average 4.5 percent.

Long-term interest rates : CBO projects that "long-term interest rates will edge up as short-term rates decline." The rate on 10-year T-notes is forecast to rise from 4.8 percent this year to 5.0 percent in 2008.

Impact of the Baby Boom Retirement and Rising Health Costs : Outlays for Medicare and Medicaid are expected to more than double by 2017. The annual growth rate in Social Security spending is expected to increase from about 4.5 percent in 2008 to 6.5 percent by 2017.