Federal government programs and policies have financial effects that stretch far into the future. Nevertheless, the overwhelming focus of federal fiscal policy is short term in nature. Discussions of federal fiscal policy typically center on deficits in the current fiscal year or 10-year budget windows. Short-term accounting or budget measures, however, provide only a partial view of the costs of federal programs and policies, and they frequently offer a potentially misleading view of the federal government's ability to pay its bills in the long term. Short-term measures, such as annual budget estimates, or medium-term measures, such as the Congressional Budget Office (CBO) 10-year baseline estimates, do not reflect long-term fiscal imbalances, and in particular they do not reflect the large anticipated costs needed to finance the baby-boom generation's retirement. Therefore, if short- and medium-term measures are not used in conjunction with long-term fiscal measures, then long-term fiscal effects of current policy will be understated or hidden. Budget measures are useful to the extent they permit governments and their citizens to make better decisions. Economic theory suggests that budget deficits can be a useful tool to smooth out short-run fluctuations, so that households are not subjected to sharp fluctuations in taxes and program benefits. In the long run, however, budgets must balance. Furthermore, deficits that persist beyond the short run will redistribute wealth among generations, and will thus have important distributional consequences. In addition, most economists believe long-term deficits have important negative effects on capital accumulation and economic growth. Therefore long-term budget measures provide valuable information about intergenerational equity and about prospects for long-term economic growth. Investors use both income statements, which show cash flows in a given year, and balance sheets, which show assets and liabilities, to understand a business's financial condition. Similarly, understanding a government's fiscal position requires more than one set of accounts. Long-term projections or measures are particularly important for understanding the growth of entitlement programs, where the full consequences of policy decisions take decades to emerge. Government programs and tax law provisions often have effects that stretch well beyond the end of standard budget windows. That being said, it is also true that short-run budget estimates have the advantage of providing far more detail. Furthermore, short-term forecasting, which exploits momentum in economic activity to predict future economic indicators, gives more reliable estimates than long-run forecasting, which depends on the presumption that key economic parameters will match historical values or values considered "reasonable" by analysts. Discussions of fiscal policy usually start with the annual budget deficit or medium-term estimates such as the 10-year CBO budget outlook projections. Another approach has been to develop forward-looking summary measures of federal fiscal policy. While the federal debt is the sum total of all deficits, net of surpluses, from the beginning of the U.S. government to the present, these forward-looking summary measures reflect aggregate deficits over the next 50 or 75 years, or even over the infinite future. Traditional macroeconomic analysis has focused on the annual budget deficit as the measure of the government's fiscal stance. However, the annual budget deficit estimates provide limited and potentially misleading information for several reasons. First, while the consequences of government spending and tax policies extend well into the future, annual deficit numbers only give information about cash flows for a single year. For example, a government sale of an income-producing asset reduces the deficit in one year and increases deficits in future years. Deciding whether the sale is penny wise in the short run but pound foolish in the long term (or not) requires multiyear budget information. Medium-term budget estimates, such as 5-year and 10-year budget projections, can provide more information about future taxes and spending and give a better guide to the total effects of changes in fiscal policy than annual deficit estimates. However, if the effects of a policy change extend beyond the end of a medium-term budget window, then a longer-term measure will be needed. Medium-term projections provide an accurate picture of fiscal policy only when conditions in the years beyond the medium term resemble years within the medium term. For this reason medium-term budget estimates currently provide a misleadingly optimistic impression of the financial condition of entitlement programs such as Social Security and Medicare. The baby-boom generation's retirement and rising costs of medical care signal the federal government's fiscal position will worsen substantially after the next decade unless significant changes are made. This deterioration in the federal government's finances does not show up in 10-year budget projections, such as the CBO baseline projections. The CBO baseline projections, by law (Section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985), estimate the fiscal consequences of current laws and policies and are meant to serve as a neutral benchmark to assess the probable fiscal consequences of new laws or changes in programs. The CBO baseline projects a 10-year trajectory of the future fiscal effects of current law. It is not intended to anticipate future policy or legislative responses. Current law is not the same as the current situation. Current law may include provisions that take effect many years in the future and which may bring about conditions far different from the current situation. Current law specifies that some future policies that some analysts consider implausible will be implemented. In particular, independent analysts focus on three assumptions widely considered to be unrealistic. First, discretionary spending is assumed to continue at a constant inflation-adjusted level that does not reflect growth in population and per capita income. Projected discretionary spending as a proportion of GDP falls by the end of the baseline's 10-year window to levels unprecedented in modern times. According to the CBO baseline, defense spending will fall from 4% in 2005 to 3% of GDP in 2016, the same as the historical minimum reached in 1999. The baseline non-defense discretionary spending total drops from 3.8% to 2.9% of GDP over the same period, below the 3.2% level reached in 1998 and 1999, which was the lowest level in the past four decades. Figure 1 shows historical data for 1987 through 2005 and CBO baseline projections for 2006 through 2016 for defense and non-defense discretionary spending. Non-defense discretionary spending has risen as a share of GDP in the years leading up to 2006. Defense spending has risen even more sharply. According to the CBO baseline, discretionary spending will decline after 2006. While the CBO baseline assumption of constant discretionary spending in real terms provides a reasonable benchmark for determining what is or what is not a spending increase, it is not a plausible basis for predicting the actual path of spending. Most independent analysts assume discretionary spending will grow at the same rate as GDP. Second, the current law CBO baseline projects that individual income tax revenues will rise sharply in coming years due to the effects of the alternative minimum tax. Most independent analysts believe that changes will be enacted to limit revenues collected by the AMT to levels far below CBO baseline projections. The number of taxpayers subject to the AMT has grown in recent years because the AMT is not indexed to keep pace with inflation. In addition, the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA, P.L. 107-16 ) and the 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA, P.L. 108-27 ) reduced taxes under the regular income tax so that many upper-middle-class households were suddenly subject to AMT provisions. Congress has enacted a series of one-year "fixes" of the AMT that increased exemptions and changed treatment of certain tax credits. However, the CBO baseline assumes that the AMT fix will expire at the end of 2006, so if Congress does not act the proportion of taxpayers subject to AMT provisions will continue to grow. The CBO estimates that about 2 million taxpayers paid higher taxes due to the AMT in fiscal year (FY) 2002, and around 30 million taxpayers will pay more in FY2010 under current law. Further, under current law, which assumes the 2001 and 2003 tax cuts expire, more than 22% of filers in 2016 will be subject to the AMT, according to projections. If the 2001 and 2003 tax cuts are extended, about 32% of filers in 2016 will be subject to the AMT. This implies that political pressure to extend AMT fixes will be substantial. Most other projections assume individual income tax revenues will be lower than CBO baseline projections. Auerbach, Gale, Orszag, and Potter (2003) assume in future years 3% of taxpayers will be subject to the AMT, which was the proportion in 2005. The CBO long-term forecasts, which are not constrained by baseline assumptions, assume that tax revenues will rise over the next eight years from current levels to 18.3% of GDP for its "lower revenues" scenarios, whereas in the "higher revenues" scenarios revenues are calculated using current law assumptions regarding individual income taxes. The Government Accountability Office (GAO) makes no explicit assumption about the AMT, but assumes tax revenues will be limited to 19.7% of GDP beginning in 2016. As a practical matter, without radical changes in the income tax system, this would be possible only with some cap on the AMT. Third, most independent analysts have assumed the Bush tax cuts and other tax provisions, with minor exceptions, will not expire as scheduled under current law. The 2001, 2002, 2003, and 2004 tax cuts according to current law are scheduled to expire by the beginning of 2011. The Bush Administration has sought to make these provisions permanent, and many analysts therefore believe fiscal projections should reflect that intention. Several other provisions of the tax law, collectively referred to as "tax extenders," such as the 10% income tax bracket, higher child tax credits, lower top tax rates, and repeal of the estate tax, are all slated to expire at the end of 2010.