captions copyright national cable satellite corp. 2008 the second set of bars are projected to be about 8% of gdp in 2022, below any year in the past 40 years and well below the 11% of gdp that such outlays have averaged over that period. yet the budget deficit under this scenario shown on the far right is projected to be 6.1% of gdp in 2022. to keep debt from rising relative to gdp, the deficit would need to be about 3.5% of gdp smaller in 2022 than we project under the alternative fiscal scenario. that's $900 billion of reduction in the deficit. relative to the scenario in that year, 2022 alone.

therefore, to put the budget on sustainable path, policy makers will need to allow federal revenues to increase to a much higher percentage of gdp than the average of the past 40 years. or make very large changes to social security and federal health care programs. or pursue some approaches. let me begin by highlighting choices that policy makers face this year. if policy makers leave current laws unchanged. the federal debt will recede slowly relative to the size of the economy. that will occur because of a large increase in revenues and sharp restraints on federal spending, apart from the large programs. however, both of those changes from historical patterns will have significant economic and social effect. moreover, the sharp fiscal restraint this year and especially next year will markedly slow the economic

recovery. on the other hand, changing current laws to let current policies continue along the lines of the alternative scenario would boost the economy and allow people to pay less in taxes and benefit more from government programs in the next few years. but would put the nation on an unsustainable fiscal course. if policy makers want to achieve a short-term economic boost and long-term and medium-term fiscal sustainability they would need to enact policies significantly wider than we project under current law, for the next few years, but significantly narrower than we project under the alternative fiscal scenario for the decade. in conclusion, how much and how quickly the federal budget difficult sit declines over the next decade will depend on how well the decade does. more critical will be the choice made by lawmakers as they face the substantial changes to tax and spending policies.

that are slated to take effect within the next year. thank you, we're happy to take your questions. everyone's benefit, please identify yourself and the organization for which you repor report. >> do alternative fiscal scenario, do not address the payroll issue, is that right? >> that's correct. can you give your estimate as to what would happen if the payroll were extended through the next year. >> we provide this in the report, if the payroll tax cut were extended for the remaining months of 2012, it would add about $75 billion to the fiscal year 2012 deficit and about $25 billion to the fiscal year 2013 deficit. because of course fiscal year 2013 starts in the last quarter of this calendar year. >> then the effects on the

economy? >> we've not reported that here. i think the part of the restraint, part of what's holding down gdp growth in our baseline projection is the gdp cut. if that were extended for the rest of year it might add about .5%, .25% to the level of gdp at the end of 2012. >> and then unemployment? >> the affect effect on unemployment, would be around half of that, so .1% on the unemployment rate. >> projections for the unemployment rates going forward? >> we do. so there's some data on the economic forecast in chapter 2. and then year-by-year tables in appendix e if you look object pages 128 and 129.

we show the average of the unemployment rate in each year over the coming decade. and we expect that declines slowly principally because of slow growth in the demand for goods and services. and thus, slow growth in businesses need for employees to produce the goods and services they're selling. in addition to the limitations on the demand for workers, we think the unemployment rate is also being held up by some structural factors. mismatches between the available workers and the available jobs. the effects of the extensions of unemployment insurance and some other factors. we think those are a comparatively small part of the current amount of unemployment. but we think that they will persist to some extent through through the decade. our unemployment rate we project for the end of the decade is a little higher now than it would have been in the absence of recession and prolonged high

unemployment. yeah? >> how much following on that how much do you see potential gdp coming down? i mean and how much are you lowering your outlook for the long-term growth capabilities for the u.s. economy? >> we have a box in chapter 2 of the report called the lasting effects of the recent recession and potential output. our current estimate is that potential output, actual output in 2022 is about 1.25% below what it would have been without the financial crisis. and the recession. we think of that as being partly smaller capital stock. businesses have been much less investment in the past few years, than they would have without the downturn. they will make up for some, but not all of that by the end of the decade. we think that some of that loss in potential output is through lower labor supply. people who have lost jobs, will either leave the labor force or remain in and not be able to find work again.

and we think part of that is a little hit to productivity growth, the productivity of those labor and capital resources. there's a wide range of possible long-term effects. i think one of the risks in our forecast is that this prolonged period of high unemployment and prolonged period of high long-term unemployment for individual workers could have a larger effect on output in the long-term. we have not had a period of such persistently high unemployment in this country since the depression. we just don't know how workers and firms will respond over time. i think we've made the best estimate that we can. but that's the source of significant uncertainty. >> how much has the estimate impacted the deficit projections. >> it raises the deficit. i don't think it's a huge amount. we show in another part of the

report, rules of thumb. for the effects of changes in the economy on the changes in the budget. so 1.25% on the level of gdp at the end of the decade is a little mr than .1% point on the annual gdp growth and we show an appendix, that if you were to lower economic growth or by about .1% point a year it would lower the deficit. >> the slow recovery, the fact that output remains well below potential for all of these years, for this year and next year and the year after and so on. has a very large budget effect. because the amount of production and the amount of taxable income is much lower for a long period. yes? >> on economic growth here, your projections are considerably lower than the blue chip and the federal reserve for 2012 and 2013. and you show growth slowing in 2013.

whereas the other forecasts show it growing. and you talk about the differences in the report. including varying assumptions on continuing current policies. can you elaborate on that? >> there are several reasons why we might have different forecasts for the economy than the outside forecasters. i think the first and most important one, i started by saying we're not trying to do a pure forecast. we're doing a projection based on particular set of assumptions about fiscal policy. that in particular, that current law remains the same. if i were doing a forecast, in a private capacity, i would be trying to predict the changes in fiscal policy that congress and president will support. that's not our role to do that. so i think probably the principal reason that our forecast for economic growth is weaker this year and especially next year, than a lot of outside

forecasters, is because we have to assume that the taxes expire at the end of this year as scheduled under current law. that all the restraints of the budget control act take effect the beginning of next year as scheduled under current law. and i think most outside forecasters, including the federal reserve, are making some other guess as to what will actually happen 0 to fiscal policy. forecasting is a very uncertain business. but when we try to back out what our forecasts might look like in the absence of this particular set of fiscal policy assumptions, we end up with numbers that look pretty similar to those that we see for outside forecasters. yes? >> on page 124 in 2012 and 2013, are you assuming that the payroll tax holiday ends on schedule?

if i use the numbers you use $785 billion to for 2012 and $25 for 2013? >> no, be careful here. those, page 124 is our projection of balances in various trust funds. i think, allen, you're referring to the balance in the old age and survivors insurance trust fund. >> right. >> a crucial part of the loss that have so far extended, created this payroll tax cut and they're being considered to extend if, is that they make up for the loss in revenue to the trust funds by putting general revenue into the trust funds. so what i've described is the effect of extending the payroll tax cut on the overall government budget. but the trust fund itself, of course they could enact an extension that would be different. but of all the ways this has been enacted and discussed in the past have made up the difference for the trust fund. >> so the noninterest differences for 11, 12 and 13,

are not the program itself. it's the program plus whatever the government, the rest of the government put in? >> yes. yes. that's right. >> thank you. >> david rotter with "reuters." i wonder if you could talk about the current fiscal year, the deficit forecast is now above $1 trillion, versus below $1 trillion in your august forecast. can you explain what the difference is there? part of the payroll taxes for a couple of months? >> yes. there's, those who want to check later, there's a table on pages 98 and 99 that decomposes the revisions to our budget projections for each of the coming 11 years. for 2012 there are a number of factors. rt of the payroll tax cut for january and february of this year. that was not built in our august projections. an important part of it is

disappointingly low corporate tax receipts. it's a little puzzling. it does not seem to be a shortfall in corporate profits as measured in the national income accounts relative to what we were expecting. rather it's a shortfall on the tax receipts that have been collected. essentially a decline we weren't predicting in the average tax rate essentially. that ends up in the corporate tax code, not the rates written into law, but simply the amount collected relative to profits as reportsed in the national income accounts. so corporate taxes have been lower than we thought. that's another piece of this. and then there's a whole collection of other fairly small changes. the revision for 2012 is about $100 billion, what we expected in august. and that's a lot of money by many standards, given the size of the flows into and out of the government budget, it's not a particularly striking revision.

>> do you have a forecast for when the current increase in the government would be consumed? >> we don't, we don't try to model the cash flows on a month-to-month basis. in general terms, we think that given our projections for the deficit, for the coming year, we think that the treasury would not come up against the borrowing limit in this calendar year. but we don't have a basis for assessing exactly when it might hit the limit. of course it depends conditioned on the accuracy of our projections on what legislation is enacted. and moreover, even when a limit is reached, then as you know, the treasury department has a number of steps it takes to continue operating while remaining below the statutory limit. and we don't try to track that

or predict that sort of thing. >> i wondered about the unemployment rate and the spike in 2013 to the 9.9%. can you explain the path for that? >> our projection on the unemployment rate rises a little bit from here to 2013. i wouldn't refer to it as a spike, particularly. unemployment rate has been between 8.5% and 9% for much of the past few months, we do expect under current law it to move up a little in 2013. and that's because of the slowdown in economic growth. which owes most importantly to the fiscal restraint. if one looks at the effects of the differences between the alternative scenario that extends expiring tax provisions and doesn't impose the enforcement procedures from the budget control act, it makes it very large difference in government inflows and outflows

in the next fiscal year. and you can see some of that. if you go to table, we have at the back of chapter 1, some of the most important tables in the document. the effects of alternative sorts of policies. table 1-6 shows the effects of a significant menu of alternatives. that policy-makers talk about. table 1-7 pulls together the pieces that underlies alternative fiscal scenario that we've used. so if you look at table 1-7 for example, one can see that the difference in the deficit in 2013, and this is fiscal year 2013, between the baseline of the alternative scenario, is almost $400 billion. so the amount of higher revenues and lower spending will occur under current law. is really quite sharp. and we think that will be pushing down the economy, as other factors are starting to push up the economy more. and that slowdown in growth that we see for 2013 then has an

effect on the unemployment rate. >> can you divide that any further between the impact of the tax side restraint versus the -- >> [ inaudible ] . >> table 1-6 has the pieces of that. so these numbers and these tables are for fiscal years. so when we do the effects on the economy in the calendar year basis, we need to take care in that. this gives you a rough sense of that. so in fiscal year 2013, the effects of extending all the expiring tax provisions meaning the 2001 and '3, and '9 cuts as well as trying to index the alternative minimum tax on inflation as well as extending the other expiring tax provisions like the research and experimentation tax credit and other things that have been routinely extended. the set of policies together extending them into 2013 adds about $300 billion to the deficit in 2013.

at the same time, the budget control act, again to make sure everybody is understanding what i'm saying here, the budget control act last summer imposed caps on discretionary spending and it set up a joint select committee on deficit reduction to try to find additional savings. but the act established a back-up plan in case that committee did not report legislation. which in the end it did not. the back-up plan is further cuts in discretionary and mandatory spending, the sort that are described here in the document. in table 1-6, we show the effect of lifting those additional reductions, the enforcement procedure. but leaving in place the original caps. and that effect on deficit in 2013 is $66 billion. and then there's also a piece, another piece of restraint is a smaller piece, is medicare's payment rates for physicians. beyond that, not really on a policy option, but a source ever restraint in the economy is waning effects of the recovery

act. so most of tax cuts and spending increases from that act are now out the door. but not all, but most. but as the effects of that wane, that is providing a further, that helped the economy before. but the waning reduces the growth rate that we'll see in this coming year. in the back? >> yes, a question on the revisions to the projections for medicare and medicaid spending. you say in there that you're expecting i think it's a $29 billion increase in outlays for medicare and $24 billion increase in outlays for medicaid. elsewhere it says that you're revising down medicaid projections because of utilization changes. i wonder what's the net difference in cbo's view of what's going to happen to those programs in their outlays? >> i don't think i have at hand the revision to the entire stream of medicare numbers or medicaid numbers over the decade. we can certainly -- find, we can

find those for you. it simply means taking one row one table here and subtracting a table from a table in an earlier report. >> do you expect, that the programs will spend more than expected in the august update? or is you, i don't know if we've made large revisions to the projections at this point. i should say although this is the big, outlook, we get more of the data we use for updating the health projections between now and our march baseline. and moreover, we have not updated for this report our projections of the effects of the affordable care act on medicaid and other programs. we'll do that for the march baseline as well. so i think we'll actually have a more complete answer to this question in a couple months. and i don't know now what the revision, what the revision has been. we do know, i should say we note in here very slow growth in medicare spending per beneficiary, in the coming

decade. relative to what we've seen over the past few decades. and we attribute that to two factors. one of them is the restraint in payments to providers. partly from the sustainable growth rate mechanism that remains in place. partly from the additional restraint imposed in the affordable care act. the second fact that are leads to slow growth in spending per beneficiary, is that the medicare population is actually getting somewhat younger over the coming decade. more people are going into medicare. but they're going in at the age of 65, so the share of medicare beneficiaries who are in their 60s, relative to their 70s and 80s is going up rather substantially over the coming decade. that means most people tend to be less expensive. the number that we cite in the document is real growth, real growth meaning adjusted for inflation and medicare spending per beneficiary has averaged about 5% per year between 1985 and 2007.

averages about 1% per year over the ten-year projection. yes? >> if i read these things correctly, the economic projections for 2012 under current policy and under current law seem to have been downgraded a little bit. and that seems to run counter to the good news/bad news the last couple of months. i wonder if you could elaborate on why that is or if you guys are seeing -- [ inaudible ] and comment on impact of you guys doing reestimate and what that does on the timing of the president's bumt, given the delay in submitting it to congress. >> the forecast will be published in august was essentially completed in early july. and a couple of important things happened after that, that we alluded to in the august report, but couldn't build into the numbers. one was the revision, the annual revision to the product accounts that made the recent history

look a little worse. than it had. at the time we were putting together the summer forecast. the second thing is there was some bad news late in the summer about the state of the economy. at the time we were releasing the forecast, there were predictions by serious analysts that the country had a one-third chance of going into recession. so if you look back at the period from early july to early december when this forecast was finished, the news was quite bad earl will i and better later, and on balance given the way we read those data and what we saw in the historical revision to the national income accounts, the near-term thrust of the economy looked a little weaker. i don't think we have significant regrets at this point about the forecast we've written down. so the gdp growth in the fourth quarter looked fairly good. but much of that was inventory investment, final sales growth, which ultimately will propel

forward investment in other parts of the economy, was not particularly strong. we still see lots of problems in the housing market. households have lost a lot of wealth, they have a lot of debt. they have a hirer ceiling that they have right now and that they years ago. and we expect more restraint from them. so i think we have good reason for expecting continued slow growth. even the absence of the fiscal restraint and the fiscal restraint push us down particularly low growth for next year. as i said, this is a very uncertain business, if one looks at the swinging moods about the near-term state of the economy over the past six months you can see why this sort of exercise is fraught with peril. >> i think you said that there is some actions that lawmakers could take to steer between a

scenario of harsh fiscal policy to recession. versus better fiscal policy that leads to 96% of doubt held by the public in the long-term. what are some of those policy actions they could take that would be -- [ inaudible ] >> so 94%, and it's not, we have not tried to late out a specific fiscal path. i think the point i was trying to make and that we've made from a number of occasions and in testimonies, is that very sharp imposition of fiscal restraint, dramatic increases in taxes or cuts in spending at a point in time under the current economic conditions in particular, will tend to hold back the economy. at the same time, letting the debt skyrocket the way it does in the alternative scenario will ultimately be very, very darjing to the economy and unsupportable

in the end. one can both provide near-term support and put the economy on a sustainable medium-term budget. on a sustainable medium-term and long-term path. to do that requires the fiscal restraint take effect slowly. but amount to a very large change from current policies. by the end of the decade. this is not as we've said a number of times before, there's no substantive advantage to waiting to decide what policy changes we will make. to the contrary, the longer we wait as a country it make the sort of choices we have to make, the harder it will be to make them. because more debt will have accumulated. because people will have less time to plan how they will react to these various changes. there's no substantive advantage to waiting to make decisions. but on the issue of how quickly those decisions should take effect, how quickly one wants

taxes or spending or both to change, that's a more complicated question and that's where you come to this tradeoff, that doing it very quickly. slows the economy now. if you wait too long, then you end up with debt that is much, much harder to manage. so there are a number of ways in which the congress could could put off some of the expiration of some of these things that are scheduled to ex-poo ir0 or put off the spending strength that will occur under the enforcement procedures under the budget control act. but not put those off indefinitely. or if one puts those things off indefinitely. then other very large changes need to be made in the budget. but it's not our place to recommend set of changes. yeah, robert? >> in the selected policy alternatives -- [ inaudible ]

accumulation of facts, policy, adjustments does not continue for people -- [ inaudible ] trillion is the cost of -- [ inaudible ] >> robert is referring to table 1-6 on page 19. we note that the cost of extending certain income tax and a estate tax provisions set to expire at the end of the year and indexing amt for inflation would have a direct effect on the deficit of 4.564 trillion dollars and then raise debt service by another $790 million. i believe it's the sum of those, robert that you're describing as $5.4 trillion. we don't have in this report, i think, an estimate of the effect of extending those provisions for all. but the highest income people. i believe in the staff of the

joint committee on taxation have done proposals like that. they're the ones who do estimates. i believe their estimates have suggested that extending the, extending the expiring tax rates, except 20r the highest tax rates, the budgetary effect is about three-quarters or four-fifths of the total amount. so only a quarter or a fifth of the $5.4 billion is attributable to what happens to the expiration of the lower versions of the highest tax rates. >> of the total here, i think about four-fifths is the effect of extending all the tax revisions except the highest rates. so one-fifth, roughly is the effect of extending the higher rates. and one needs to be little careful about describing that as