On Tuesday, the administration finally admitted that the March CBO numbers were right, and that the projected 2010-2019 deficit will be $9 trillion instead of $7 trillion. As the Washington Post editorialized this morning:
NO ONE LIKES to be the bearer of bad news -- especially when it could threaten your multibillion-dollar health-care reform bill. And so the Obama administration did not exactly rush to publish yesterday's required mid-session update to its federal budget estimates of last February. Still, once the numbers finally emerged in the dog days of August, they retained the power to stun: Instead of a cumulative $7.1 trillion deficit over the next decade, the White House now projects a $9 trillion deficit. These figures imply average annual budget deficits greater than 4 percent of gross domestic product through fiscal 2019, a rate of debt accumulation faster than projected GDP growth. This is not a sustainable fiscal path.The projected FY2009 deficit is $1.6 trillion and FY2010 is $1.5 trillion, increasing the national debt by 31% in just two years. That’s the highest level of deficit spending since WW II.
The extra $1.9 trillion in red ink mainly reflects the Office of Management and Budget's adoption of more realistic -- that is, more pessimistic -- estimates of economic growth and unemployment. White House officials protest that their original, rosier numbers made sense at the time; actually, plenty of forecasters, including those at the nonpartisan Congressional Budget Office, made more accurate calls. This situation was foreseeable and should have been acknowledged earlier.
Editorial writers at the Wall Street Journal argue that even these deficit projections are unrealistically low:
[T]hese deficit estimates are driven entirely by more domestic spending and already assume huge new tax increases. CBO predicts that debt held by the public as a share of GDP, which was 40.8% in 2008, will rise to 67.8% in 2019—and then keep climbing after that. CBO says this is "unsustainable," but even this forecast may be optimistic.The WSJ news article also suggests that the budget includes optimistic revenues from selling cap-and-trade credits.
Here's why. Many of the current budget assumptions are laughably implausible. Both the White House and CBO predict that Congress will hold federal spending at the rate of inflation over the next decade. This is the same Democratic Congress that awarded a 47% increase in domestic discretionary spending in 2009 when counting stimulus funds. And the appropriations bills now speeding through Congress for 2010 serve up an 8% increase in domestic spending after inflation.
Another doozy is that Nancy Pelosi and friends are going to allow a one-third or more reduction in liberal priorities like Head Start, food stamps and child nutrition after 2011 when the stimulus expires. CBO actually has overall spending falling between 2009 and 2012, which is less likely than an asteroid hitting the Earth.
Federal revenues, which will hit a 40-year low of 14.9% of GDP this year, are expected to rise to 19.6% of GDP by 2014 and then 20.2% by 2019—which the CBO concedes is "high by historical standards." This implies some enormous tax increases.
The numbers don’t even include all proposed spending, according to the WSJ editorial:
The White House issued a statement yesterday that the President is "very concerned about these out-year deficits." But apparently not so concerned as to stop pushing for a new $1 trillion health-care entitlement that is conveniently not included in these latest budget forecasts.This reminds me a comment by Lex in the Financial Times last week:
Obamanomics has turned into an unprecedented experiment in runaway government with no plan to pay for it, save, perhaps, for a big future toll on the middle class such as a value-added tax.
Deficit attention disorderDespite the prevalence of high school economics classes, a majority of today’s teenagers and 20-somethings remain financially illiterate. Perhaps when they realize these deficits are being left for them to pay, they will support a cutback in these unsustainably high levels of government spending. (And if new taxes are created to support the spending, then a few years of Jimmy Carter-style stagflation will convince them that shrinking the size of government is the only answer.)
The notion that the US Congress spends money like a bunch of drunken sailors has been called unfair. After all, the latter spend their own money.
Like any debt, the sooner the insidious effect of compound interest is checked, the less painful it will be. But even reversing earlier tax cuts and avoiding expensive new programmes will not be enough. The CBO calculates that a permanent spending cut of 8 per cent of output today would be necessary to simply stabilise borrowing in the long run – equivalent to eliminating all military spending plus healthcare for the indigent overnight. It is not short-term deficits but the future budgetary abyss that should be Washington’s priority.