(Still) Tempting Fate

This updates our most recent analysis of the budget outlook (Auerbach and Gale 2011) to incorporate the effects of August’s debt-limit deal and the latest Congressional Budget Office Projections (CBO 2011c). We thank Samuel Brown and Spencer Smith for research assistance. All opinions and any mistakes are those of the authors and should not be attributed to the staff, officers, or trustees of any of the institutions with which they are affiliated. We present new estimates of the budget outlook, incorporating the impact of the recent debt-limit deal and the latest projections by the Congressional Budget Office and the Medicare and Social Security Trustees. Although the official budget figures have improved relative to a year ago (as a result of the debt-limit deal and lower interest rate projections), realistic budget projections show that the medium-term outlook remains troublesome and the long-term outlook remains unsustainable. Even with the recent legislation in place and the economy recovering fully by 2017, as projected by CBO, on a path following current policy with respect to taxes and spending (for example, by making the Bush tax cuts permanent and indexing the alternative minimum tax for inflation), deficits will exceed $8 trillion (4 percent of GDP) over the nex