Differing Economic Assumptions Between OMB and CBO

Back in February, we dinged the President's budget for relying on overly optimistic economic assumptions in 2012 and beyond. CBO's Analysis of the President's budget showed much higher deficits, in part because they used different assumptions about economic growth and employment. Now that there are updated baselines from both CBO and OMB, we can compare them again to see how they stack up.

To OMB's credit, in addition to their "official" economic estimates, they provide alternative economic estimates if the economy performs more poorly given recent economic and financial developments this summer. If these alternative projections were to come true, it would add another $180 billion to their deficit projections from 2012-2021. These projections (Alt. OMB) are included along with the Mid-Session Review (MSR), CBO's August baseline (CBO), and the President's budget (Feb. Budget) in the table below.

 

Economic Projections in CBO's August Baseline and OMB's Mid-Session Review
  2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
 Real GDP Growth (Calendar Year)
MSR 2.1% 3.3% 3.7% 4.0% 3.9% 3.7% 3.2% 2.7% 2.5% 2.5% 2.5%
CBO 2.4% 2.6% 1.7% 4.4% 5.0% 3.2% 2.8% 2.5% 2.5% 2.3% 2.3%
Feb. Budget 2.7% 3.6% 4.4% 4.3% 3.8% 3.3% 2.9% 2.6% 2.5% 2.5% 2.5%
Alt. OMB 1.7% 2.6% 3.5% 3.9% 4.1% 4.1% 3.7% 2.9% 2.5% 2.5% 2.5%
Unemployment Rate (Calendar Year)
MSR 8.8% 8.3% 7.7% 6.9% 6.3% 5.7% 5.3% 5.2% 5.2% 5.2% 5.2%
CBO 8.9% 8.7% 8.7% 7.9% 6.1% 5.4% 5.2% 5.2% 5.2% 5.2% 5.2%
Feb. Budget 9.3% 8.6% 7.5% 6.6% 5.9% 5.5% 5.3% 5.3% 5.3% 5.3% 5.3%
Alt. OMB 9.1% 9.0% 8.5% 7.8% 7.0% 6.1% 5.5% 5.2% 5.2% 5.2% 5.2%
Change in Consumer Price Index (Calendar Year)
MSR 2.8% 1.8% 1.9% 2.0% 2.0% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
CBO 2.9% 1.5% 1.3% 1.3% 1.8% 2.1% 2.3% 2.3% 2.3% 2.3% 2.3%
Feb. Budget 1.3% 1.8% 1.9% 2.0% 2.0% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
Alt. OMB N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

 

Clearly, the Mid-Session Review has more realistic projections for the upcoming few years than the President's budget, lowering the growth prospects as the economy has slowed in the past few months. It still remains more optimistic than CBO's numbers, although the alternative projections are comparable or sometimes worse than CBO.

However, we should note that there should be a difference in economic projections between CBO and OMB since they use different policy assumptions. CBO uses current law assumptions, meaning, among other things, that the 2001/2003 tax cuts expire. OMB uses current policy assumptions, which extend most of the tax cuts, with other (generally) debt-increasing policies. The difference should be--and is--apparent especially in 2013, when the tax cuts expire in CBO's baseline, but are mostly extended in OMB's, preventing contractionary policy. Conversely, in the out-years, the higher levels of debt should weigh on the economy.

We do know that there should be a difference in the economic numbers due to differing policy assumptions. The question is: how much difference should it make? Luckily, CBO has quantified the economic effects of using current policy assumptions in their August update. Granted, they include some policies that OMB does not include (for example, the extension of the upper-income tax cuts), but these numbers are much more comparable to OMB's than their current law estimates. They provide four different economic measures in 2012, 2013, and 2021.

Comparing Economic Projections Under Current Law and Current Policy
  2012 2013 2021
 Real GDP Growth (Fourth Quarter to Fourth Quarter)
Mid-Session Review 3.2% 4.0% 2.5%
CBO Current Policy 2.9% 2.8% 2.1%
CBO Current Law 2.7% 1.5% 2.3%
Unemployment Rate (Fourth Quarter)
Mid-Session Review 8.2% 7.4% 5.2%
CBO Current Policy 8.4% 8.0% 5.2%
CBO Current Law 8.5% 8.7% 5.2%
Interest Rate on Ten-Year Treasury Notes (Calendar Year Average)
Mid-Session Review 3.8% 4.3% 5.3%
CBO Current Policy 3.2% 3.5% 5.7%
CBO Current Law 3.2% 3.3% 5.3%

 

So, even after accounting for policy differences, OMB is still significantly more optimistic than CBO, especially in the short term.

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