Meltdown 101: A Closer Look At The Huge Budget Deficit Estimates
WASHINGTON — Get ready to hear a lot of huge numbers Tuesday: The Obama administration is expected to boost its estimate of the federal deficit over the next decade by $2 trillion, a move likely to trigger political wrangling over who's to blame and how harmful all the red ink will be.
The White House's Office of Management and Budget is expected to forecast $9 trillion in deficits over the next 10 years, up from a $7 trillion estimate earlier this year, according to White House officials who spoke last week on the condition of anonymity. The increase is largely due to lower-than-expected tax revenues as a result of the recession.
Meanwhile, the Congressional Budget Office will issue its own deficit forecasts Tuesday. The CBO estimated in March that the deficit for 2010-19 would total $9.1 trillion.
Here are some questions and answers about all the numbers.
Q: Why do the agencies' estimates differ?
A: Both the White House and Congress have their own budget agencies to analyze tax and spending trends, and both agencies are required to issue regular budget updates.
The OMB's 10-year estimate was smaller than the CBO's earlier this year because its economic assumptions were more optimistic. The White House projected that the economy would shrink by only 1.2 percent in 2009 and grow at a healthy pace in 2010 and beyond.
The CBO, meanwhile, projected that the economy would contract at a 2.2 percent annual rate this year. That seems closer to the mark, as the economy shrank at a 6.4 percent clip in the first quarter and a 1 percent annual rate in the second quarter.
Many economists criticized the administration's forecasts earlier this year for being too bullish. Some Republican critics contend that's still the case.
Douglas Holtz-Eakin, a former CBO director, wrote in a memo Monday to the House Republican leadership that the administration is overestimating the amount of revenue it will receive and underestimating spending. For example, the White House is including $640 billion from a program to restrict greenhouse gas emissions that Holtz-Eakin says won't pan out.
Some private economists, though, have become more optimistic recently. Many are forecasting growth between 2 percent and 3 percent in the second half of this year.
Q: Does that mean the CBO is more reliable?
A: In general, the CBO is seen as the more independent of the two agencies, said Gary Burtless, an economist and budget expert at the Brookings Institution.
While both answer to politicians – the OMB director is appointed by the president, the CBO director by the leaders of whichever party controls Congress – "people tend to think (the CBO) doesn't bend to the political winds of (its) masters" as much as the OMB, he said.
Still, both can be "wildly inaccurate" because 10-year forecasts are "at best guesswork," said Stan Collender, a partner at Qorvis Communications and former congressional budget official.
Collender notes that there will be five congressional elections over the next 10 years and any number of foreign and domestic challenges that will make the actual deficit figures very different from the estimates.
Q: Still – $9 trillion! Isn't this going to harm the economy?
A: Most economists are concerned about the government's budget gap, but many consider it a longer-term problem to be addressed in the next couple of years. Getting the economy to grow again is a more pressing issue, they say, and increasing taxes or cutting spending could interfere with that goal.
Taking steps to reduce the deficit now "makes no sense," Collender said. "The right time to do it is when you have unambiguous evidence that the economy is recovering and the recovery will be strong."
Once that is apparent, "we really will have to change government (budget) policy," Burtless said. Otherwise, the sea of red ink could soak up so much capital that it would raise interest rates for businesses that want to borrow and expand.
Q: How did it get this large?
A: Like an overextended shopper, the government is spending more while receiving less revenue. According to the CBO, government spending is up 21 percent in the first 10 months of the budget year that ends Oct. 1, compared to the same period last year, while revenue is down 17 percent.
The OMB is expected to say Tuesday that the deficit for 2009 will come in at $1.58 trillion, a record, though down from an earlier estimate of $1.84 trillion. That's because the administration no longer expects to spend an extra $250 billion it had earlier set aside to help banks.
Much of the additional spending is from the $700 billion bank bailout enacted last October and the Obama administration's $787 billion stimulus package.
The temporary nature of those programs could make the deficit easier to reduce, according to both Collender and Burtless. They note the stimulus package will end in 2010, and other spending should drop once the economy improves.
For example, the government will spend more than $100 billion on unemployment compensation this year, more than two and a half times the amount spent last year. That should automatically decline in a recovery, without Congress having to make any changes, Burtless said.
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Associated Press Writers Jim Kuhnhenn and Andrew Taylor contributed to this report.
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CHRISTOPHER S. RUGABER | 08/24/09 05:47 PM |