Deficit Projections

Greg Mankiw writes:
Making matters worse, these bleak budget projections are based on relatively optimistic economic assumptions. The administration forecasts economic growth of 3.0 percent from the fourth quarter of 2009 to the fourth quarter of 2010, followed by 4.3 percent the next year. By contrast, the Congressional Budget Office predicts growth of 2.1 percent and 2.4 percent for these two years. Lower growth would mean less tax revenue, larger budget deficits and a more rapidly increasing debt-to-G.D.P. ratio.

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If the President’s proposals were enacted, the federal government would record deficits of $1.5 trillion in 2010 and $1.3 trillion in 2011. Those deficits would amount to 10.3 percent and 8.9 percent of gross domestic product (GDP), respectively. By comparison, the deficit in 2009 totaled 9.9 percent of GDP.

Measured relative to the size of the economy, the deficit under the President’s proposals would fall to about 4 percent of GDP by 2014 but would rise steadily thereafter. Compared with CBO’s baseline projections, deficits under the proposals would be about 2 percentage points of GDP higher in fiscal years 2011 and 2012, 1.3 percentage points greater in 2013, and above baseline levels by growing amounts thereafter. By 2020, the deficit would reach 5.6 percent of GDP, compared with 3.0 percent under CBO’s baseline projections.

CBO Estimates

2009: 1.413 trillion

2010 CBO baseline: $1360 billion
2010 CBO (Obama): $1500 billion

2011 CBO baseline: $995 billion
2011 CBO (Obama): $1341 billion

2012 CBO baseline: $641 billion
2012 CBO (Obama): $915 billion

FY2010 Budget: Taxing and Spending

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CBO Analysis of 2010 Budget Proposals

A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook

read the CBO report

Budget Deficit: $1.85 Trillion

The U.S. budget deficit in 2009 is projected to spike to between $1.67 trillion and $1.85 trillion, according to estimates released Friday by the Congressional Budget Office...

"CBO's estimates of the deficits under the president's budget are higher each year than those estimated by the administration -- by $93 billion for 2009 and by about $2.3 trillion for the 2010-2019 period," the report said...

An annual deficit between $1.67 trillion and $1.85 trillion would mark a record in dollar terms and the highest as a share of gross domestic product since World War II. It would represent between 11.9% and 13.1% of GDP.

The enormous leap in the annual deficit -- it was $459 billion in 2008 -- is primarily due to the effects of the financial and economic crises and the government's response to them...

read the CNN story

My thoughts: $2 trillion. We are six months away from the end of the fiscal year. Another stimulus package and rosy scenario projections will likely drive the deficit well beyond $2 trillion.

Obama's Budget Deficit Projections

The budget forecast assumes that U.S. gross domestic product -- the nation's total economic output -- will decline about 1.2% this year, while private forecasts -- measured by the Blue Chip survey -- show a 1.9% decline. Next year the Obama team forecasts 3.2% growth, while professional forecasters expect a 2.1% gain...

The Obama budget puts the deficit at less than $600 billion starting in 2012 from $1.75 trillion this year. Getting to that point requires GDP to rise more than 4% a year by then -- meaning the U.S. would quickly return to growth rates similar to the boom years of the 1990s -- after the worst financial shock since the Great Depression. Such growth is more than a full percentage point above private-sector growth estimates for 2011 and 2012.

Speaking to reporters Thursday, White House economist Christina Romer called the projections an "honest forecast" by the administration's professional forecasters. "I'd reject the premise that we're noticeably rosier," she said. "We certainly are somewhat more optimistic, but certainly nothing out of the ballpark."

read the WSJ article

My thoughts: The growth estimates are unrealistic. The total increase to the national debt is about $3 trillion. Reality will likely double this number. Also notice the ratchet effect.

Obama Budget Irresponsibility Inconsistency

Page 14 of the President’s FY2010 budget “blueprint” contains a section called “Fiscal Irresponsibility” that deserves scrutiny:

“Another manifestation of irresponsibility is the large budget deficits we are inheriting. These deficits, over time, will harm economic growth and impose burdens on our children and grandchildren.”

True.

“Between 2000 and 2008, real Government outlays increased at a 3.6 percent annual average rate, three times the 1.2 percent annual average rate between 1992 and 2000…Furthermore, the amount of debt held by the public has nearly doubled to $6.4 trillion from 2001 to 2008. We are now living with the fallout of this deep fiscal irresponsibility.”

True.

“Unfortunately, we are also inheriting the worst economic crisis since the Great Depression—which will force us to increase deficit spending temporarily as we try to jumpstart economic growth.”

Time-out. The administration accurately states that federal spending and debt have increased at a detrimental pace this decade. Then it says we’re in the worst economic crisis since the Great Depression.

And the solution to the economic downturn caused in part by too much spending and debt is to increase deficit spending and further run up the national debt? By the administration’s own logic, shouldn’t we be experiencing economic growth with all the deficit spending it “inherited?”

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FY 2010 Budget

His outline includes an ambitious plan to reform health care, half of which would be paid for by increasing the tax bite on high-income Americans.

Obama has said repeatedly that his first fiscal plan would have a two-pronged mission: to reduce the $1 trillion-plus deficit he inherited to $533 billion by 2013 and make big investments in the future.

The administration estimates that the deficit for fiscal year 2009 will reach $1.75 trillion, or 12.3% of U.S. gross domestic product. That's a record in dollar terms and is the highest as a share of GDP since World War II.

read the CNN story

Obama's Budget Plans

The highlights:

1. Obama wants the 2013 deficit to be half the size of the 2009 deficit he inhereted.
2. The 2010 deficit is going to be large.
3. Specifically, we’ll go from $1.2 trillion in 2009 to $1.5 trillion in 2010 to $533 billion in 2013.
4. Spending cuts are expected to come from the expiration of stimulus money, from a reduction in “emergency” appropriations for Iraq and Afghanistan, from reductions in Medicare Advantage giveaways to private insurance firms, and I believe from some other form of medical efficiencies.
5. Revenue enhancements are projected to come from the expiration of the Bush tax cuts, from ending the hedge fund manager’s loophole, and from carbon auction permits.
6. Overall, the idea is to get back down to a deficit of about 3 percent of GDP, but to have a better health care system when we do it.

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