Budget projections are a rather fickle thing, especially in the midst of great uncertainty about the strength of the economic recovery. By accident, CBO is providing a great demonstration of this fact in trying to get the numbers right for 2011.
In the January baseline, they projected that the deficit would jump from $1.29 trillion last year to $1.48 trillion this year, a new record over the $1.41 trillion shortfall recorded in 2009. It made sense, considering that there had been tax cuts beyond what was contained in the 2010 tax code (i.e. the payroll tax cut and the new estate tax parameters), and the economic outlook had not improved much.
However, they quickly revised their projection down to $1.40 trillion in their March baseline, attributing the $80 billion difference mostly to technical adjustments to other mandatory programs like TARP, loan programs, deposit insurance, and unemployment insurance. Still, the 2011 deficit was projected to be more than $100 billion higher than the 2010 deficit.
But, as CBO's Monthly Budget Review for July shows, even the March baseline may still be overstating this year's shortfall. According to the MBR, the deficit through July for this fiscal year is $1.1 trillion, which is actually $65 billion lower than the deficit through July of last year.
|Spending, Revenue, and Deficits Through July (billions)|
*These numbers are CBO projections ($1,399) and CRFB extrapolations ($1,210).
Much of this difference comes from individual income taxes. Revenue from the income tax has jumped almost 25 percent compared to last year, much higher than the 11 percent increase that CBO predicted in their earlier baselines. If that trend holds up, it would increase CBO's revenue count by almost $115 billion.
In fact, if you project forward full year numbers for 2011 based on the growth of spending and revenue from 2010 so far, it becomes apparent that this year's deficit may not only be below 2009's, but also 2010's shortfall. Using that extrapolation, the deficit would be "only" $1.21 trillion in 2011, $85 billion lower than last year. Of course, this number is dependent on those overall budget trends holding up.
Make no mistake -- the deficit for this year will be very large, either the second or third highest deficit in history. But, based on the way it's looking right now, don't be surprised if the final 2011 deficit comes in a bit lower than CBO originally predicted. Then again, it's also a statement on our fiscal policy when a $1.2 trillion deficit is good news.