Beware Politicians Bearing “Cuts”

What with the President’s new plan to cut the deficit, I thought it an opportune time to take a sideways look at the term “cut” when used by politicians and government bureaucrats.

A normal person would think that “cutting the budget” or “budget cuts” mean that the amount spent year-to-year decreases. But politicians and bureacrats actually mean cuts to what we planned on spending in the future in that the amount spent year-to-year continues to increase but not as much as planned. Which makes them feel so proud of themselves. So very proud. The term for these cuts is “deficit reduction.”

So Obama’s deficit plan will cut $3 trillion over the next 10 years. From the projected CBO baseline of cumulative deficits totaling $3.5 trillion between 2012 and 2021. The good news here that the baseline is much lower than the previously projected $6.7 trillion. But wait! That depends on current law not being changed.

For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, 2009, and 2010 were extended (rather than allowed to expire on December 31, 2012, as scheduled); the alternative minimum tax was indexed for inflation; and cuts to Medicare’s payment rates for physicians’ services were prevented, then annual deficits from 2012 through 2021 would average 4.3 percent of GDP, compared with 1.8 percent in CBO’s baseline projections. With cumulative deficits during that decade of nearly $8.5 trillion, debt held by the public would reach 82 percent of GDP by the end of 2021, higher than in any year since 1948.

So, how likely is it that one or all of these things will happen?

Well, cuts to physician fees have been delayed annually for a decade now and yet the “future cuts” still get included in official budget estimates. Indexing the Alternative Minimum Tax or AMT for inflation is a bit trickier – not indexing it for inflation would hit the middle class with higher taxes, which Congress doesn’t like to do. The Bush tax cuts may or may not be extended beyond 2012 – it’s after the 2012 election, so… We’ll see.

Baselines matter. The super committee has to find $1.2 trillion in government savings over 10 years. But they could use the unreality of the CBO’s under current law or the more realistic baseline. That will significantly change the size of the deal they need to reach.

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