Baseline

The term baseline, when it relates to fiscal policy, means a projected estimate of what spending, revenues and resulting deficits and debt will be over a period of time, based on certain assumptions. The baseline is then used to estimate the impact of various fiscal policy proposals.

What you should know about it

The use of baselines, especially in federal budgeting, is something that is very important but not widely known or understood by the general public. However, its underlying purpose is something that many people practice in their own lives in regards to their finances.

In personal budgets, people must make projections about their future finances, including how much they will earn and spend. These projections are based on certain assumptions, such as what bills will be due, or whether they expect a raise next year. People then make decisions based on these estimates. Sometimes what ends up happening is different from what was estimated, but it is still necessary to start with a base projection as a basis to make decisions in order to estimate their potential impact.

The same goes for the federal government; however, the problem is that politicians often use different baselines depending on their purpose and what they are trying to show. For example, when Members of Congress propose a piece of legislation that will impact spending and revenues, it must be “scored” by the non-partisan Congressional Budget Office (CBO), meaning that its estimated impact is calculated. However, this estimated impact must be compared to what spending and revenues would have been without it, i.e. a baseline. Yet, the baseline that the CBO is required to use, called “current law”, projects only those things which are written into law. However, in reality many of the laws have provisions in them that are unlikely to happen, such as full expiration of all the Bush/Obama tax cuts at the end of 2012. Instead of using the CBO’s baseline, politicians will often come up with their own baselines that that allow them to claim that their plans will reduce the deficit by much larger amounts.

Instead of using creative accounting and politicized baselines, the public should demand that politicians state what the impact of their proposals would be based on debt as a percentage of GDP. In addition, they should be transparent about all key assumptions, including how fast they expect the economy to grow in order to assess their reasonableness.