The bottom line from the Congressional Budget Office:
Things look like they are getting better, but the CBO doesn't quite want you to believe it (at least not in the short run).
The Congressional Budget Office (CBO) projects that if current laws and policies remained the same, the federal government would run budget deficits of $368 billion in 2005 and $295 billion in 2006 (see Summary Table 1). However, because of the statutory rules that govern such baseline projections, those estimates omit a significant amount of spending that will occur this year--and conceivably for some time in the future--for U.S. military operations in Iraq and Afghanistan and for other efforts in the war on terrorism.
This is also important information:
CBO's revenue projections rest on the assumption that current tax laws remain unaltered except for scheduled changes and expirations, which occur on time...
The assumption that tax provisions expire as scheduled can have a significant impact on CBO's estimates. Many expiring provisions are extended almost as a matter of course, and most of them reduce receipts. Thus, revenue projections that assumed the extension of those provisions would be lower than revenue estimates projected under current law...
Assuming that the expiring provisions enacted in [Economic Growth Tax Reconciliation Act of 2001], [Jobs and Growth Tax Reconciliation Act of 2003], and [Working Families Tax Relief Act of 2004] were extended, CBO and the Joint Committee on Taxation (JCT) estimate that revenues would be about $1.66 trillion lower through 2015. About six-sevenths of that reduction would occur from 2011 through 2015. However, extending the changes to estate and gift taxes, which expire at the end of 2010, could reduce revenues as early as 2006 because some taxpayers might postpone taxable gifts that they would otherwise have made during this decade if they knew that the repeal of the estate tax would become permanent in 2011...
In the opposite direction, six provisions that are set to expire over the next decade would increase revenues if they were extended. The provision with the largest effect is the Federal Unemployment Tax Act surcharge, which would boost revenues by about $11 billion between 2008 and 2015 if extended...Extending the mine reclamation fees would raise about $200 million per year. The other four provisions, if extended, would raise about $100 million altogether through 2015.
Even abstracting from these complications, lots of things can happen. I find this picture, summarizing the CBO's uncertainty about ultimate outcomes, interesting.
And the long-run budget picture? This will come as no surprise.
In the decades beyond CBO's projection period, the aging of the baby-boom generation, combined with rising health care costs, will cause a historic shift in the United States' fiscal situation. Over the next 30 years, the number of people age 65 or older will double, while the number of adults under age 65 will increase by less than 15 percent.(10) Moreover, health care costs are likely to continue to grow faster than the economy. (Between 1960 and 2001, the average annual growth rate of national health expenditures exceeded the growth rate of GDP by 2.5 percentage points.)
Driven by rising health care costs, spending for Medicare and Medicaid is increasing faster than can be explained by the growth of enrollment and general inflation alone. If excess cost growth continued to average 2.5 percentage points in the future, federal spending for Medicare and Medicaid would rise from 4.2 percent of GDP today to about 11.5 percent of GDP in 2030 (see Figure 1-4). The Medicare trustees assume that excess cost growth will decline to 1 percentage point, on average; however, even at that rate, federal spending for Medicare and Medicaid would double to 8.4 percent of GDP by 2030.(11)
Outlays for Social Security as a share of GDP are projected to grow by more than 40 percent in the next three decades under current law: from about 4.2 percent of GDP to more than 6 percent. Such costs are likely to creep up gradually thereafter. By contrast, federal revenues credited to Social Security are expected to remain close to their current level--around 5 percent of GDP--over that period.
Together, the growing resource demands of Social Security, Medicare, and Medicaid will exert pressure on the budget that economic growth alone is unlikely to alleviate. Consequently, policymakers face choices that involve reducing the growth of federal spending, increasing taxation, boosting federal borrowing, or some combination of those approaches.
UPDATE: Kash at Angry Bear shows you what the path of the debt and deficits might look like if the President is successful in making his tax policies permanent.
Also, in case you were wondering how to interpret the fan chart above, which summarizes the CBO's own assessment of budget outlook uncertainty, here is the description from the relevant section of the report:
Using the difference between past CBO baselines and actual budgetary results as a guide, Figure 1-3 displays a range of possible outcomes for the total deficit or surplus under current law (excluding the possible impact of future legislation). The current baseline projection of the deficit falls in the middle of the highest-probability area, shown as the darkest part of the figure. But nearby projections--other paths in the darkest part of the figure--have nearly the same probability of occurring that the baseline projection does. Projections that are increasingly different from the baseline are shown in lighter areas, but they also have a significant probability of coming to pass. For example, CBO projects a baseline deficit of 1.2 percent of GDP for 2010. However, under current law, there is roughly a 5 percent chance that the actual outcome that year will be a deficit greater than 6 percent of GDP. Similarly, in the absence of further legislative changes, there is a 35 percent chance that the budget will be in balance or surplus in 2010.
UPDATE II: Andrew Samwick expresses his disappointment.