The report is a graphic reminder of the task ahead for House-Senate negotiators led by Biden. CBO: Debt could grow to double GDP

Applying a little shock treatment to White House deficit talks, the Congressional Budget Office released new projections Wednesday showing that the U.S. debt could be nearly twice the nation’s GDP in 25 years absent real changes in spending and tax policy.

Instead of confining itself to CBO’s often rigid long-term baseline rules, the report creates an “alternative fiscal scenario” that the authors argue is more politically realistic in that it doesn’t assume that Congress will let all the Bush-era tax cuts expire or that Medicare physician payments will be allowed to drop precipitously over the coming years.


Upper-middle-income families would still be protected from the alternative minimum tax under the same scenario, and revenues held to 18.4 percent of gross domestic product, close to what’s become a Republican goal.

Under these assumptions, as mapped out by the CBO, debt held by the public would top 100 percent of GDP by 2021 and, two years later, exceed its historical peak of 109 percent. By 2035, it would be approaching 190 percent of GDP and equally important interest on that debt would be equal to 9 percent of GDP — more than five times current levels.

Critics of the CBO will argue that its alternative scenario is excessively grim in some cases. The new Congress has begun to make real cuts in appropriations spending, which the forecast doesn’t reflect. And costly cuts in estate and gift taxes — agreed to last December — may very well not survive politically in the long term.

Nonetheless, Wednesday’s report is a graphic reminder of the task ahead for House-Senate negotiators led by Vice President Joe Biden, and CBO’s release comes at a pivotal point in those talks under way at the Capitol.

“The explosive path of the federal debt under the alternative fiscal scenario,” the CBO report reads, “underscores the need for large and rapid policy changes to put the nation on a sustainable fiscal course.”

After a three-hour meeting Wednesday, Biden and Treasury Secretary Timothy Geithner both left without significant comment. “We’re meeting tomorrow [Thursday], and we’ll probably be meeting Friday,” said Biden, who is leading the talks. “We’re still moving.”

“There will be an agreement,” said Senate Finance Committee Chairman Max Baucus. “I can’t say when, but there will be an agreement.”

The picture is less grim under the CBO’s more formal “extended-baseline scenario” in the same report and truer to the conventions that typically guide the budget office.

These rules limit the CBO to projecting only current law, so if a tax cut expires, it is assumed to be gone even though Congress has repeatedly extended the same provision, such as the annual patch for AMT relief. The same applies to Medicare, where the CBO must assume real reductions in physician payments when in fact lawmakers have stepped in to spend more to stabilize the situation.

While all the numbers provide important benchmarks, the result is often to marginalize CBO’s influence: The extended baseline assumes tax revenues as high as 23.2 percent of GDP by 2035, a huge swing that seems politically unrealistic. For this reason, the CBO creates alternative scenarios such as the one in Wednesday’s report to be more relevant and to educate lawmakers on the choices before them.

Last year, for example, a similar alternative was used, although that version did not assume the full extension of the high-end Bush-era tax cuts for wealthier families. Given that Republicans won this concession in December from President Barack Obama, the CBO opted to add these tax cuts to the mix now.

The cumulative effect of all the temporary tax reductions is striking. If Congress did nothing, and let all the tax breaks expire, the CBO projects that the debt held by the public would still grow to 84 percent of GDP by 2035 — but that would be less than half of what it represents under the alternative with the tax cuts preserved.

Anti-tax Republicans will surely be most sensitive to the attention paid by the CBO to revenues as an influence on debt and deficits.

In the talks now, House and Senate GOP leaders want to keep the focus entirely on spending and have ruled out including any new revenues in the mix of deficit-reduction measures being considered. At the same time, Biden has argued that eliminating at least some tax expenditures has to be an option to close the gap and bring along Democrats’ votes.