The Weirdness of 10-Year Deficit Reduction « The Baseline Scenario

James Kwak writes in The Baseline Scenario about The Weirdness of 10-Year Deficit Reduction.

"The projected 2021 deficit is $729 billion, but net interest spending is $807 billion (Table 1-5). That means that the primary budget is running a surplus of $78 billion, the entire deficit is due to interest payments on the debt, and the debt has stabilized around 75 percent of GDP. This is not a great situation, but it’s no emergency, either."

"Now, you may point out that the baseline is unrealistic, and I agree. But the three most unrealistic things in the baseline cancel themselves out."

"The big policy uncertainty that hangs over the ten-year baseline is the Bush and Obama tax cuts of 2001, 2003, and 2009, which were extended in December 2010 and now expire at the end of 2012. If we extend all of those tax cuts, we will add $612 billion to the 2021 deficit (on top of $137 billion for patching the AMT). That’s real money. To which my answer is: let them expire. Let all the tax cuts expire, and there is no ten-year deficit problem."

"Instead, the Gang of Six plan proposes to cut taxes by $1.5 trillion (over ten years) relative to the CBO baseline — which means $1.5 trillion in unnecessary spending cuts. The real problems come after the ten-year horizon, when Medicare spending accelerates due to an aging population and increasing health care costs."