The fiscal cliff–averting American Taxpayer Relief Act (ATRA) significantly changed the policy landscape for what looks to be an extended budget debate over the year. For one, most (though not all) policy uncertainty over expiring tax cuts and credits was settled for the foreseeable future. Congress is very unlikely to pick up any new revenue measures this year.
But the bill also highlights how far we are from meaningful deficit reduction. My colleagues and I at the Tax Policy Center have examined what happens to both spending and revenue paths, under the new law and under a scenario that incorporates other likely policies, including the permanent extension of current payment rates to Medicare physicians and a failure to abide by the spending sequester (which, you’ll recall, was a result of the super committee’s failure to reach a budget agreement in late 2011).
We also make an important assumption about the direction of discretionary spending in the long run. Under current law, discretionary spending, on both the defense and domestic sides of the budget, is scheduled to drop to historic lows. Under our “plus likely policies” scenario, we assume that discretionary spending doesn’t fall below its historical lows of 3 percent of GDP for defense and 3.2 percent of GDP for domestic spending. Those lows occurred in 1999 following a period of relative peace, rapid economic expansion, and few of the demographic pressures we now face.
Ben Harris over at TaxVox has more.