provisions that affect high-income peoples. some people pay tax up to the highest rates. i was trying to be careful about the wording but garbled. >> are you guys seeing impact of the downgrade last year on the deficit over the next few years? do you factor in these set of costs, the debt interest payments or other impacts? >> well, interest rates as we project them in this outlook, are lower than the rates we projected in the summer outlook. and that reduction is importantly because market interest rates have actually fallen. since we produced the earlier forecast. in addition, not just current market interest rates, but the implied future interest rates that one can extract from quotations of financial markets. in addition, other forecasters, whom we look for reference points have lowered their

forecast of interest rates. so on balance, the set of news, that financial markets have seen since our previous forecasts, suggest lower borrowing costs, not higher borrowing costs. there are a number of pieces of news that probably play a role in that. part is what's happening in europe. the financial situation in europe has clearly worsened. and i think there's much more concern about the possibility of really terrible outcomes in europe. part of that i think, in the sumpl was concern about the weakness of the u.s. economy. and with that said, not just about the demand for credit today, but the demand for credit over the coming years. part of the news was about u.s. fiscal policy. we don't know how to separate out the part about u.s. fiscal policy. i think an important risk in our forecast is the possibility that

interest rates will rise more sharply than we had built in here. now, it's also possible rates will be lower than we built in here. we try to construct forecasts in the middle of the distribution of possible outcomes. but these rates that we see in financial markets are a good deal lower than even for the end of the decade. are a good deal lower than we would expect ourselves, given the state of the economy that we, we think will be in place at the end of the decade. given the demand for credit, given the fiscal policy that we see. so in essence, we're surprised at how low interest rates are. and we take some signal from the financial markets, i think appropriately. but in countries that have had large amounts of debt and growing amounts of debt. financial markets reactions to that, can change very quickly.

if we look at the countries in europe that have experienced particular problems over the last couple of years, you can see very quick increases in interest rates when market perceptions tournament and i think they turn partly from numbers and partly from a sense about ability of policy makers to address. fiscal problems. it's very hard to predict when that will happen and we one issue we briefed years ago about the risk of a fiscal crisis, and one of the points we made there, is the uncertainty about, about how, how and when people will become reluctant to lend money to the government and start charging higher interest rates to do that. lori? >> "washington post," is this the first opportunity you've had to punt explicit numbers on the economic impact of the budget control act sequester? in other words, is this likely

to add fresh panic to the hill about the plane crash coming at the end of the decade? >> in the summer update, the congress had -- >> that's yes or no question. [ laughter ] >> i learned a bit about this job and -- not giving that kind of answer. in the summer update, the budget control act was passed, so its effects were built in to the budget and the economic projections, but they were built in in a way that in a sort of neutral way. because we didn't know whether there would be action by the joint select committee and the congress and what it might be, or whether there would be this fall-back to the enforcement procedures. at this point because the committee did not reach an agreement and no legislation has been enacted. it's the sequestration of reduction in caps to

discretionary spending. so the full flowering of that is seen here for the first time in a way it was not august. but we've also talked about this with joint select committee, we've talked about it in a report we issued in mid september. we first laid out what we thought the numbers would do. we don't think it should be news, but it is true it's in our outlook in this form for the first time. >> follow-up on a question two related questions. first of all, do you assume the automatic cuts hit oco, as well as other regular spending and then secondly. can you explain why you in your alternative scenario, you assume that the automatic cuts are repealed? >> the first question to bring everybody into the conversation is whether there would be a reductions in the funding for

overseas contingency operations, essentially the war in afghanistan and other places. we call oco. and yes, so the sequestration, my colleagues will catch me if i have this wrong. the sequestration of budget authority for discretionary programs for fiscal year 2013, applies to those overseas contingency operations as well as to the rest of the budget. those, the oco funding is not capped, but it is subject to this, to this reduction. the second question, the other thing you used was the term 050 for people who don't follow this, that's a budget function for national defense. which i'm proud to say i've learned. the other question you asked was how we decided what to include in this alternative fiscal scenario. so we have for some time shown in our outlooks, a menu of alternative fiscal policy

assumptions. so that members in congress and their staffs who are coming themselves from a different starting point than current law can see what would happen to the budget under that, under that starting point. i think as the last few years have gone on, and more and more aspects of the budget have either been enacted on temporary basis or extended on a temporary basis, we felt that the current law baseline provides less an less useful guide to what the current stance of fiscal policy is. so we tried to lengthen the menu of the alternatives we showeded. because there are different sorts of policies that people on the hill will say, we won't do that, i want to think about the budget a different way. we've lengthsened the to pull te of the alternative policies that many people in congress and outside of congress talk about. as a policy that yes, they're in

current law, but they're very different from past policies in the way that members of congress or others don't want to have take effect. so when we, so for example, there is lots of tax provisions that are scheduled, that some expire already at the end of last year. some scheduled to expire at the end of this year. and many people on the hill say they want to extend those policies. it's useful to see, i think, what happens to the budget in that case. for the budget control act, congress explicitly decided last summer to impose certain caps on discretionary appropriations. and then i think they decided they wanted to have a process to agree upon some larger set of changes in fiscal policy. and that process was this special committee. and the powers given to that sort of enforcement mechanism meant by descriptions of people in the congress as sort of threat to try to make propel the committee and the congress it

taking action. but i think many members of congress don't want those particular cut-backs to take effect. we can see this in discussions on the hill. people say, well we're going to find a way to not have those automatic enforcement procedures take effect. to be clear, we have no, we have no recommendation, we have no position on whether or not those things should be allowed it take effect. but in the case where a lot of our clients say they don't want them to take effect, and don't want certain other things to take effect, then we think it's useful for their purposes for us to try to assemble a set of provisions of current law. that many people say they don't want to take effect. and show just how different the budget outcome is. under those different assumptions. david? >> i thinkmake sure i understan what you're saying about what the economy would, how your forecast would look different, if you sequester didn't take effect and the tax cuts, the

alternative fiscals. you said in ould be 2% higher. >> by the end of 2013. so can i refer people to this table and th on while i try to answer david's queson table 2-2,tabl 2-2 on page 30. there we are. so this summarizes the economic effects of the policies. and the baseline under the alternative scenario. if you look at the middle column for 2013, we project that real gdp under the alternative scenario would be between .5%, and 3.7% higher at the end of 2013. so for my comments i just picked the mid point of that range. we use the range deliberately, because this is an uncertain

business. the other thing i did was i talked about gnp. and i talked about gnp, which we show on the bottom row of the table. it's not much different in the near-term, but it's a fair bit different by 2022. this is not just an arcane matter of national income accounting, this is a substantive and important difference. gdp is a measure of what's produced in the country. some of the income from what's produced in the country goes to people overseas. because they have either worked here or they have sent their investment capital here. similarly, we as citizens of this country collect money that, from overseas investments of ours, that adds to our standard of living. so gnp is a better measure of the income earned by americans than gdp is. one thing that happens, that the country runs larger deficits, is that the greater demand for funds, or less demand for funds

in total or less availability of funds for the private sector in this country, draws in some capital from overseas. that enables us to keep producing. but we don't get the benefit of that. the return ultimately goes to people overseas. is we do estimates for example in our long-term budget outlook of the effects of alternative fiscal outcomes, on the well-being of american citizens over time. we tend to focus on gnp. so in this case, the numbers i use were the gnp numbers from the bottom of the table. that's where you can see in 2022, a reduction in gnp between 1% and 3.7%, with a mid-point of about 2. >> that would not be about 2, would it, about 2.5%. >> a follow up, your forecast for gdp growth, if we took our medicine in 2013, raised

taxes -- you're projecting some very dramatic increases in economic growth. 2014, 2015, 4% on average, pretty darn healthy. what are the analytics about that sustainability. and then a question -- [ inaudible ] . >> the first question, to, the way to think about it is that in the absence of fiscal restraint, fiscal policy, which we're neutral over the next few years, we think the economic growth would gradually strengthen. as the effects of the lost wealth and run-up in debt weigh less on households, as the overhang of excess housing units, is worked off, through both greater demand for housing and the low level of construction. as businesses gain greater confidence. so we look, we'd be looking for growth that would be picking up.

the fiscal restraint does, is to hold that, is to offset much of that in, in particularly in 2013, when it takes effect. but then that fiscal restraint, the effects of the restraint wanes, it's there, but consumption is already fallen and starts to grow again from there. i think what you're seeing in the pop is basically just the absence, is the waning of this pressure from fiscal policy holding down growth in 2013. combined with restorative forces of the economy. that of course are very delayed in this case. but that we think will ultimately take effect. >>. [ inaudible ] revenue and spending effects and drilling down little bit on that. i saw some of the tables on surtax, et cetera that that generate. could you break that out a little bit more for us? is there a change, have you changed your assumptions and projections for say the spending component of this? i know you said on per capita

basis it will be slow the growth in the per capita of medicare spending, for example. can you break that out a little bit for us? does it net-net basically, saying -- [ inaudible ] >> we have not done a full estimate of the effects of the affordable care act since early last year. early last year when we did an estimate of the effects of repealing the act. and we testified about that to managing commerce committee and the house last march. we will as part of our march baseline, be estimates of the coverage components of the affordable care act in a way that will be visible to you and others. because those, those pieces sort of sit somewhat separately from the rest of what's happening in the budget. the medicare provisions, the changes that were nad in the affordable care act are now interlaced with the whole accumulated history of

legislation for the medicare program. so although we update those projections and as i said before, we'll be doing it focusing on the updating of the medicare and medicaid projections for march, those new projections won't automatically give us the effects of the affordable care act itself. because those projections will be based on the whole sum of law that is now in place. whether we do estimates in the future of the effects of taking out certain provisions of the affordable care act and replacing them or not with certain other provisions, is really up to the priorities of the congress. and we will, i don't know if and when we'll do that. jonathan? >> you mentioned the unsustainability of the alternative fiscal scenario. i'm looking at the phrase on page 29 about gdp 2.1% smaller or 0.2% larger than current law.

that means possible in 2022. can you give us some idea of whether that's a likely partat that's the end-point of the distribution and also again about the of the omb delay in submitting the budget. >> yes, i'm sorry. on the economic question, this2 30, the upper right corner for gdp. we show the effect on gdp on the output made in this country from minus 2.1%, to plus 0.2%. so what that means is the buyer modeling under certain sets of assumptions, it's possible the gdp would be slightly higher in 2022. however, it's important to understand the limitations of that estimate. the first is the point i made which is that we'll be possibly producing a little more here. but the larger share of the return to that production will

be going overseas. so the standard of living of americans, based much more on gnp will be down in 2022 for any of the range of assumptions we use. moreover, the table went out further, what you would see is even that plus 0.2 in the upper right corner disappear and become negative. >> there's a certain year where it would be negative? >> yes. and the reason for that is there are essentially two opposing, opposing forces at work here. the alternative fiscal scenario, we've outlined here, there are lower tax rates. beginning in 2013 and going beyond the end of the decade. the lower tax rates will by our estimates, boost labor supply and saving. the opposing force is there will be much larger deficits. and that extra government borrowing will be crowding out increasing amounts of private capital formation. and the tax rate effect, morals

constant, my colleagues should correct me if i have this wrong, is more or less constant as a share of gdp. it's a sort of increment to the level of gdp, a little more work, a little more saving. it gross a little bit, but not very much. whereas the debt is accumulating at a very rapid rate. so the depressing effects of that debt accumulation increasingly outweigh the positive effects of lower tax rates as we go out in time. if you saw this piece by piece, sort of force by force over the decade and beyond, you would see that the debt is gaining ground. >> is it fair to say, given the stretch between minus 2.1 and plus 0.2, that there would likely be a negative in 2022? >> oh yes, yes, most definitely. i don't know. 90% of that range is on the negative side of zero. you asked a question about timing. so what we do every spring is we, we work on a new baseline, a march baseline. and we do an analysis of the

president's budget. that analysis of the budget is in two pieces. we release analysis of the direct budget effects in march. and then we in budget. in march, april, we usually release the effects of the economics budget. the delay of the budget this year puts us behind in that process. nonetheless, it is a very high priority for the budget committee to finish it from which the base we will estimate the cost of legislation throughout the year and complete the analysis of the presence of the budget. so we will work as hard as we can, and we hope to release both the march baseline and the presence of the analysis budget by the end of march, but we can't be sure. we don't know what's in the budget yet or how hard it will be. we don't know what issues we'll confront in trying to do those estimates. we work flat out during this period on this effort. and as i say, we aim for the

middle of march, but we can easily -- we can easily be later if we encounter more difficulties. >> a week late means a week late. >> well, the exact timing has differed a bit from year to year, and i think it really does depend on what we find in the budget. it also depends what else the congress is doing. if they move efficiently toward a resolution of these issues that are -- in which the deadline is the end of february, then that helps us. if they move there in a more rambling path, then that's a lot more work for us, and i don't -- i wouldn't -- certainly would not try to make a prediction about that. darryn. >> in the campaign there seems to be an argument that it's out of control because they're spending too much. you're arguing that really the problem is the aging of the population. can you explain a lit bit more

why the cpo sees it that way and what the relative weights are between the factors that are being cited in the political realm versus what you're seeing in the demographic realm? >> of course, i won't speak to what's being cited the political realm -- >> i wish you would. >> -- but i think if you look at the chart still up on the screen, you can see the basis for cbo's comment on this topic. relative -- we've clearly had a burst of spending, spending relative to gdp has been particularly high the past few years relative to our history. and as i've said, it actually recedes a little bit in the next few years under current law. but the amount of spending that was undertaken in the past few years through the recovery act and other legislation is being

-- that's happening against the backdrop of steadily rising costs for social security and the major federal health care programs. and the increases in the costs of those programs are not a surprise. analysts have been talking about them for decades. the aging of the population was pretty well foreseen. the fact that health care costs rise more economy has been going on for some time. so the general contour is one that i think probably the first cbo spoke about in this room. but the numbers, i think, are quite striking. given the -- i think this chart was trying to capture some of that. social security and the federal health care programs will

represent about 5% of gdp more 2022 than they have on average in the past 40 years. maybe it's 5.5%. that's a tremendous increase for those programs. now, the current law sets us on a path to try to offset in a sense some significant part of that through restraint in other programs. and the second set of bars shows how all other federal programs put together are significantly a smaller share of gdp by the end of the decade -- this coming decade than they were on average in the past. and that's not -- and that's -- you see that across a number of programs. so defense spending. i should say this is the alternative fiscal scenario so it takes away the enforcement procedures of the budget control act. it goes back to the basic cap. it would be nearly at the lowest

end of the gdp. nondefensive discretionary spending will be the lowest it's been in my lifetime. all of the entitlement prmsy an health care programs would be close to their small share of the gdp in my lifetime. so there's a fair amount of restraint built in already in all the parts of the budget. the spending side of the budget except for the social security and the federal health care programs. and -- but you can see despite the restraint in other places, total spending will still be a larger share of gdp, and that's driven by those programs. and the growth in those programs is driven by the aging of the population and rising costs for health care. so there really is a stark choice here. even with other parts of the budget squeezed -- and, of course, one can squeeze various things further or relax them

more. given that all other federal programs together will be 7.8% of gdp in 2022 and the deficit we project will be 6% of gdp in 2022 under the scenario, clearly the deficit will not be brought under control without changes in at least one of revenues and social security and the large health care programs. and if one focused on trying to reduce the deficit to a manageable level in 2022 starting from this benchmark and folks are doing it just through tax increases, it would require very large increases in taxes if focused on just through social security. it would require very large reductions and benefits through those programs. even if one does it through a combination of revenue increases. the changes on both sides of the ledger would be considerable. so the gap that's opened between what we are used to getting from

the government in terms of benefits per person and in terms of operations and the rest of the government and the revenue that we're used to giving to the government has widened a great deal and is going to widen further over the coming decade. bob? >> bob samuelsson, "washington post." can you just go over the medicare spending projections again? you said earlier that your projections incorporate an assumption that spending per beneficiary would grow about 1%, i think, over the period of the projection as opposed to the historic rate of 5%, and i'm wondering whether or not that differs substantially from your previous projections, and i think the part of the slowdown is simply the younger people coming into medicare. but is that mainly driving this

change, or is the change being driven by the recent experience when medicare spending has been lower than expected and also the provisions in the affordable care act that mandate slower increases for some categories, hospital spending, et cetera? >> those are good questions which i don't have equally good answers. we have not tried to decompose this slower growth quantitatively into the two pieces for for the two reasons i described. we think both things are important. both payment rates to providers and the changing demographics of the medicare population, but i don't know how much of a difference is due to one or the other. i don't think this is much different than what we showed in august. we didn't -- i don't know the exact numbers from that point. i don't think there's been much difference. again, part of this is the restrangt imposed by the affordable care act. so if one went back to a

projection before that, all else equal, you'd see additional slowing from that factor, but i just don't know the -- i don't know the decomposition and the importance of these different factors. yes. >> just an additional question on medicaid. one of the options that's being discussed among lawmakers for dealing with the sustainbling growth rate problem is using some of the savings in the oco. i know there were some changes. i was trying to figure out the math here and could about quite follow it. does -- you know, even though some of that has been added into the baseline, is there still enough there that could be used by lawmakers if they wanted to offset, i think you said it was $316 billion for sgr in this update. >> so i think that the -- let me give you some facts and then discuss the interpretation of those facts. the one fact, i think -- my colleagues will catch me if i don't have this right -- is that our baseline projects about $1.4 trillion in budget authoty