Saturday, March 21, 2009

Attention: deficit disorder!

Huffington Post, July 28, 2008:

The government's budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that promises to force the winner of the presidential race to dramatically alter his economic agenda.

The deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday.

The result: the biggest deficit ever in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.
Huffington Post, February 26, 2009:
President Barack Obama charted a dramatic new course for the nation Thursday with a bold but contentious budget proposing higher taxes for the wealthy and the first steps toward guaranteed health care for all _ accompanied by an astonishing $1.75 trillion federal deficit that would be nearly four times the highest in history.
Congressional Budget Office blog, March 20, 2009:
Largely as a result of the enactment of recent legislation and the continuing turmoil in financial markets, 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.

Our analysis of the President’s [proposed] budget proposals indicates that:

As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period. CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13 percent of GDP) in 2009 and $1.4 trillion (10 percent of GDP) in 2010. It would decline to about 4 percent of GDP by 2012 and remain between 4 percent and 6 percent of GDP through 2019.

The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline., March 20, 2009:
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.
Under the 1997 Stability and Growth Pact, the European Union requires less developed countries to have a budget deficit of 3% of less to be allowed to join the EU. The CBO predicts the Obama budget would double budget deficits (even after the economy recovers) and exceed the 3% figure as far indefinitely (at least a decade).

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