The budget: Ammunition for the critics
From The Economist print edition
A grimmer economic outlook from Congress’s scorekeeper
BY THE standards that obtain in the blogosphere, the duelling posts of Peter Orszag and Doug Elmendorf are pretty tame stuff. But they are still exciting, because Mr Orszag runs Barack Obama’s budget office and Mr Elmendorf heads Congress’s fiscal watchdog, the Congressional Budget Office (CBO). The debate over the budget hinges heavily on whose economic forecasts are more accurate.
On February 26th Mr Obama released an ambitious budget plan that boosted spending, cut taxes on most workers and raised them on the rich, and projected a cumulative budget deficit over the next ten years of $7 trillion. Immediately, critics cried that the deficit would be a lot larger but for an over-optimistic economic forecast. They were given ammunition on March 20th when the CBO released its own analysis, which put the cumulative deficit at $9.3 trillion, largely because of weaker projected economic growth. That figure would represent a near-doubling of the present federal debt.
Mr Orszag swiftly responded on his blog. First he noted that all budget forecasts are full of uncertainty, including the CBO’s—which, as he pointed out, he used to head before moving to his current job. Then he noted that a big reason for the CBO’s higher deficit numbers was a view of the economy’s long-term potential growth rate that is lower than most private-sector forecasters assume—too much pessimism, in other words. Irrelevant, Mr Elmendorf suggested on his own blog on March 23rd: the level of GDP matters more than its growth rate in determining the level of the deficit and on that front the CBO is more optimistic than the private sector.
One thing not in dispute is that, since the White House prepared its forecast, the outlook for this year has become a lot worse. (That said, some recent data, such as higher house sales in February, suggest that the crisis may be stabilising.) That is one reason why the CBO’s near-term numbers are grimmer. In the longer term, the CBO thinks potential growth will be lower because of slower labour-force growth and because a bigger government debt will crowd out private investment.
The CBO also expects low inflation. That results in nominal GDP falling 1.5% this year by its calculations, the largest such drop since 1938. Between 2016 and 2019 the CBO thinks nominal GDP will on average be almost 8%, or $2 trillion, a year less than the White House’s estimate, resulting in much less tax revenue (see chart). At the same time, the CBO has calculated that the cost of bailing out the financial system will be $200 billion more than it originally assumed.
The net result is not pretty. The White House thinks the deficit will fall to 3% of GDP in 2013, then roughly stay there; the CBO thinks it will only fall to 4%, and then climb back to almost 6% by 2019. The White House sees publicly held debt stabilising at 67% of GDP; the CBO sees it climbing steadily to an alarming 82%.
Whoever is right, the CBO’s numbers are a problem for Mr Obama. Republicans have seized on them to buttress their message that Mr Obama is spending the country into oblivion. No matter that their competing proposal of a spending freeze is economic heresy during a recession.