Budget Experts Take the Pelosi Challenge: How Much Could We Save by Leaving Iraq and Letting Bush Tax Cuts Expire?

At the request of House Speaker Nancy Pelosi (D-CA), the non-partisan Congressional Budget Office (CBO) recently examined the impact of three alternative “policy scenarios” on our current budget deficit, expected to hit $1.5 trillion for 2009. Their conclusions were fascinating — or troubling, depending on your degree of fiscal hawkishness.

Pelosi Scenario One can be defined as the nation’s real status quo, assuming that the stimulus bill remains a one-off law that does not change future budgetary estimates. The alternative minimum tax is also assumed to be indexed for inflation every year — something Congress never fails to do — and current spending on Medicare doctors’ fees as well as the wars in Iraq and Afghanistan are assumed to continue at their current rates. The result is unnerving:The deficit would be $218 billion higher this year than CBO already predicts and $8.4 trillion higher over the next 10 years.

But of course, current spending on Iraq is bound to change as troop levels subside this year and next. So Pelosi Scenario Two envisions the same circumstances as the first, except that the current force strength in Iraq, Afghanistan, “and elsewhere” dips from 190,000 this year to 75,000 by the end of President Obama’s first term.

The result is $1.4 trillion in long-term savings: the same $218 billion deficit increase for this year, but only a $7 trillion increase over the next 10 years.

Okay … how about those Bush tax cuts for Americans earning more than $250,000, the ones that Obama wants to let expire in 2010? Pelosi Scenario Three envisions the same Iraq/Afghanistan movement as No. 2, plus the expiration of the upper-income Bush tax breaks on schedule.

The result is a whopping $2.8 trillion in long-term savings: the 10-year deficit would be $5.6 trillion above what’s already assumed.

All these numbers can be a bit confusing, but here’s the rub: a sensible policy of drawdown in Iraq and reverting to Clinton-era tax cuts to the wealthy saves $2.8 trillion over the next 10 years.

Focusing on the reversal of the Bush tax cuts alone, the CBO found a $124 billion price tag to keep them alive for all earners into 2011 but only a $65 billion cost if the tax cuts were reserved only for middle- and lower-income Americans. So when Republicans talk about the “impact of the deficit on future generations,” just remind them that $59 billion of that problem can be solved by making life a little harder for high earners.