A new Congressional Budget Office report released today analyzes the president's budget projections and finds that costs are higher than were initially expected by the administration. Peter Orszag, director of the Office of Management and Budget, just spoke with reporters about the findings. He harped on a simple message: This is normal, it's part of the budget process, and everything is running smoothly. His explanation for the differences between the projections of his office and the CBO (which he recently led) came in several parts; first, the CBO is working with newer data than the OMB had when it was writing this projection, second, they make different technical assumptions about the impact of a wide range of policies, and third, even small changes in revenue or cost assumptions are magnified in the overall deficit number.
What about that overall deficit number?
CBO's baseline projections of the deficit have risen by more than $400 billion in both 2009 and 2010 and by smaller amounts thereafter. Those projections assume that current laws and policies remain in place. Under that assumption, CBO now estimates that the deficit will total almost $1.7 trillion (12 percent of GDP) this year and $1.1 trillion (8 percent of GDP) next year—the largest deficits as a share of GDP since 1945. Deficits would shrink to about 2 percent of GDP by 2012 and remain in that vicinity through 2019.
Fiscal hawks will be focused on those increases in the 2009 and 2010 projections during the coming debate, though "it's easy to exaggerate fluctuations in the deficit projectiosn that are driven by small changes in the underlying estimates," Orszag observed.
Note, though, that the budget is still on track to cut the deficit in half by the end of the president's term, reaching a sustainable 2 percent of GDP. Orszag acknowledged, however, that the budget resolutions will be written from CBO numbers and that the administration has (wisely enough) always expected changes to come in the legislative process. Nonetheless, he remains confident that the administration's four "key principles" -- significant investments in health care, education, and renewable energy, and cutting the deficit in half by 2012, are all still within reach. According to Orszag, the chairs of the various House and Senate budget committees have confirmed that to him.
The OMB director also observed that the CBO's GDP growth projections are on the lower end compared to the Blue Chip average, the Federal Reserve's estimates and the OMB's calculations, all of which are about .3 - .4 percent higher. Which is why this may be the most important graph in the document:
GDP growth projections range, and they range more the further out from the present you look. But those are the numbers that will determine what kind of revenue, and what kind of deficits, the government will have going forward.
Minor additional thought: The report does basically say that the recession is going to end in the fall of 2009 because of the stimulus and the Fed's aggressive actions. Wonder if critics will mention that inconvenient fact when they start going after the president's plan?
-- Tim Fernholz
