WASHINGTON — The Congressional Budget Office Thursday upped the estimated cost of the Build America Bond program by $10 billion to $36 billion over 10 years in its new estimates on the fiscal 2010 budget deficit and economic outlook.
The BAB cost estimate eclipsed the CBO's $26 billion 10-year estimate released in January. The estimate applies only to the current BAB program set to expire at the end of the year, and does not account for any proposals to extend it at a lower subsidy rate.
Legislation is currently pending in the House that would extend BABs for two years while gradually lowering the subsidy rate from the current 35% level to 30%.
The CBO noted the cost of making direct-subsidy payments to BAB issuers is "more than two-thirds" offset by higher tax revenues reaped by the taxable bonds. In its March analysis of President Obama's fiscal 2011 budget, the CBO said extending BABs at a 28% reduced subsidy would increase outlays by $88 billion from 2011 through 2020.
But the net cost to taxpayers would be $8 billion, thanks to $80 billion in increased tax revenue generated by BABs. The program cost the government less than $500 million in 2009 and is expected to cost $2 billion for 2010, the CBO said. State and local governments have issued $125.6 billion of the bonds through Wednesday.
The CBO's current BAB estimate is included in its updated cost estimates for the American Recovery and Reinvestment Act. The stimulus law is now expected to add $392 billion to the deficit in 2010 and $814 billion through 2019 — $48 billion less than the agency's January estimate on the 10-year ARRA cost.
The CBO also revised lower its total deficit estimate for fiscal 2010 to 9.1% of gross domestic product from the 9.2% estimated in January. The federal government had a 9.9% deficit-to-GDP ratio in fiscal 2009, the largest since World War II. The total debt held by the public for fiscal 2010 was revised higher to $61.6 billion from $60.3 billion.
The CBO's estimate assumes that the tax cuts signed by President George W. Bush in 2001 and 2003, plus tax cuts enacted as part of ARRA, will expire at the end of the year. As a result, the office expects the deficit-to-GDP ratio will shrink to 2.5% by 2014. Obama has proposed extending the tax cuts except for the two highest tax brackets, which are slated to return to 36% and 39.6% in 2011.
On the economy, the CBO revised higher its estimate for fiscal 2010 real GDP growth to 3.0% from its 2.2% January estimate. Real GDP in 2011 was revised higher to 2.1% from 1.9%. The office expects the unemployment rate to average 9.5% for the year and to decline to 9.0% next year.
The Federal Reserve will not begin to raise interest rates until early 2012, the CBO estimates. It added that since the Fed "has never conducted monetary policy with such large holdings of assets and liabilities, it might have some operational difficultly in calibrating the removal of that stimulus."
The 10-year Treasury note will have an average yield of 3.4% for 2010 and will increase to 3.5% for 2011, the CBO said. Net interest the government will pay on debt held by the public was revised higher to $202 billion in 2010 from $187 billion in 2009.
The increase stems from higher inflation this year, which will add to the cost of the Treasury Department's inflation-protected securities as well as the sharply higher level of debt issued this year.
Patrick Temple-West writes for The Bond Buyer.