The Next Bubble: Obama's Budget Deficit

[ViktorNavorski]

The Next Bubble: Obama's Budget Deficit (http://www.forbes.com/2009/03/20/federal-budget-deficit-business-washington-budget.html?feed=rss_news)
Joshua Zumbrun
The U.S. could be in the hole $2.3 trillion more than expected--and that's if the economy performs well.

WASHINGTON, D.C.--As President Obama prepares to send his budget to Congress next week, he's run into a bit of a stumbling block. The Congressional Budget Office said Friday that the national debt under the president's budget will be $2.3 trillion deeper than the White House estimates.

Now for the real bad news: Both estimates are optimistic. If the economy continues to deteriorate faster than economists project, those numbers will balloon further.

Over the next decade, the CBO projects that the White House budget will run $9.3 trillion in deficits. The White House projection had been $7 trillion. The problem for Obama, as his budget moves to Congress: Lawmakers tend to trust CBO figures over all others. "CBO's word is the gospel," Sen. Chuck Grassley, R-Iowa, the ranking member of the Senate Budget Committee, said in a statement.

When the White House released its budget in February, its economic forecast was in the same ballpark as other estimates, but decidedly on the sunny side. One assumption, for example, was that the average unemployment for 2009 would be 8.1%. That assumption was quickly blown to pieces when the Bureau of Labor Statistics announced two weeks later that unemployment had already reached that level by January. The CBO projects 2009 unemployment will instead be 8.8% before peaking in 2010.

The key metric, when determining if a deficit is controllable, is looking at the ratio of the debt to the country's GDP. If this ratio is shrinking, then the debt is manageable. The White House said this would happen by 2013. The CBO says this will not happen, even by 2019. This difference between White House and CBO estimates is driven primarily by assumptions about the overall direction of the country's economy.

That economic reality could be even worse than what the CBO projects. After a 1.5% loss in 2009, the CBO says real GDP will grow by 4.1% in 2010 and 2011, hopeful assumptions shared by Obama's team. "As you emerge from a recession, economic growth rates can temporarily be quite high because you're starting from such a low base," promises Peter Orszag, director of the White House Office of Management and Budget.

This is indeed the case with some recessions. But growth can also be quite slow for years coming out of a recession, leaving tax revenues much lower--and deficits higher--than either the CBO or White House projections.

The White House estimates are "incredibly high by recent historical standards," says Martin Regalia, chief economist for the U.S. Chamber of Commerce. The Chamber, quick to point out that it supported both the $700 billion bank bailout and the stimulus package, is opposed to Obama's budget. If spending stays elevated without a robust recovery, an increase in taxes is one of the only ways to close the deficit.

Orszag says new numbers from the Congressional Budget Office are an expected part of the process, and the White House will stick to its goal of cutting the deficit in half, using CBO numbers not its own numbers.

Speaker of the House Nancy Pelosi released a statement saying she believes the House can pass a budget reflecting the president's priorities in two weeks. The Senate was less sanguine. "The reality is we are going to have to make adjustments to the president's budget if we want to keep the deficit on a downward trajectory," says Sen. Kent Conrad, D-N.D., the chairman of the Senate Budget Committee. If the economy doesn't pick up soon, that'll be the understatement of the decade.

[Lt-Col A. Tack]

Same story, different news article


Congress: Obama's Budget Would Create Huge Deficit

By Andrew Taylor, Associated Press Writer
Manufacturing.Net - March 20, 2009
WASHINGTON (AP)

President Barack Obama's budget would generate deficits averaging almost $1 trillion a year over the next decade, according to the latest congressional estimates, significantly worse than predicted by the White House just last month.

The Congressional Budget Office figures, obtained by The Associated Press Friday, predict Obama's budget will produce $9.3 trillion worth of red ink over 2010-2019. That's $2.3 trillion worse than the White House predicted in its budget.

Worst of all, CBO says the deficit under Obama's policies would never go below 4 percent of the size of the economy, figures that economists agree are unsustainable. By the end of the decade, the deficit would exceed 5 percent of gross domestic product, a dangerously high level.

The latest figures, even worse than expected by top Democrats, throw a major monkey wrench into efforts to enact Obama's budget, which promises universal health care for all and higher spending for domestic programs like education and research into renewable energy.

The dismal deficit figures, if they prove to be accurate, inevitably raise the prospect that Obama and his allies controlling Congress would have to consider raising taxes after the recession ends or paring back his agenda.

But without referencing the figures, Obama insisted on Friday that his agenda is still on track.

"What we will not cut are investments that will lead to real growth and prosperity over the long term," Obama said. "That's why our budget makes a historic commitment to comprehensive health care reform. That's why it enhances America's competitiveness by reducing our dependence on foreign oil and building a clean energy economy."

Many Democrats were already uncomfortable with Obama's budget, which promises to cut the deficit to $533 billion in five years. The CBO says the red ink for that year will total $672 billion.

The worsening economy is responsible for the even deeper fiscal mess inherited by Obama. As an illustration, CBO says that the deficit for the current budget year, which began Oct. 1, will top $1.8 trillion, $93 billion more than foreseen by the White House.

The 2009 deficit, fueled by the $700 billion Wall Street bailout and diving tax revenues stemming from the worsening recession, is four times the previous $459 billion record set just last year.

The CBO's estimate for 2010 is worse as well, with a deficit of almost $1.4 trillion expected under administration policies, about $200 billion more than predicted by Obama.

By the end of the decade, the deficit under Obama's blueprint would go back up to $1.2 trillion.

Long-term deficit predictions have proven notoriously fickle -- George W. Bush inherited flawed projections of a 10-year, $5.6 trillion surplus and instead produced record deficits -- and if the economy outperforms CBO's expectations, the deficits could prove significantly smaller

Democrats in Congress are readying Obama's budget for preliminary votes next week, and they promise to cut the deficit in half within five years.

Democrats are likely to curb somewhat Obama's request for a 9 percent increase in non-defense agency budgets.

Obama's $3.6 trillion budget for the 2010 fiscal year beginning Oct. 1 contains ambitious programs to overhaul the U.S. health care system and initiate new "cap-and-trade" rules to combat global warming.

Both initiatives involve raising federal revenues sharply higher, but those dollars wouldn't be used to defray the burgeoning deficit.

Republicans say Obama's budget plan taxes, spends and borrows too much, and they've been sharply critical of his $787 billion economic stimulus measure and a just-passed $410 billion omnibus spending bill that awarded big increases to domestic agency budgets.

The administration says it inherited deficits totaling $9 trillion over the next decade and that its budget plan cuts $2 trillion from those deficits. But most of those spending reductions come from reducing costs for the war in Iraq.

Link (http://www.manufacturing.net/article.aspx?id=190822)