Three days after the release of the President's budget, our blog series  continues to provide new analysis.
In our detailed analysis  of the President’s budget, yesterday, we argued that while “[t]he budget claims to stabilize the debt at 77 percent of GDP…these claims rely on a number of charitable assumptions.” Unfortunately, deficits and debt under the budget proposal could be substantially larger than advertised for two reasons: optimistic economic assumptions and assumptions about unspecified savings which Congress will identify later.
As we explained with regards to the economic projections:
"The economic projections in the budget show significantly higher growth over the next few years than what is projected by CBO or the Blue Chip Consensus… On average, over ten years, OMB projects real GDP growth of more than 3.2 percent per year, compared to less than 2.9 percent for CBO."
These faster growth rates lead to higher levels or revenue and less spending on unemployment and other countercyclical programs – which means lower deficits. As compared to the Congressional Budget Office, in fact, the President’s Budget projects more than $1.5 trillion in lower deficits under current law in the next ten years.
On top of this, the budget relies on a number of “magic asterisks” – budgetary savings with no policy behind them. As we explained:
“Some of the largest areas of deficit reduction are assumed rather than real. After two years, the budget assumes doc fixes will be fully offset – on a same year basis – without identifying any policies to achieve this. Meanwhile, the President calls for existing and expanded transportation spending to be paid for through “bipartisan financing,” but never identifies where this financing would come from”
Absent these unspecified savings, the deficit would be another $780 billion higher.
|OMB Deficit Projections||$1,101||$768||$645||$607||$649||$7,206|
|Economic & Technical Adjustments*||$64||$61||$70||$55||$107||$1,507|
|Unspecified SGR Offsets||$0||$0||$23||$32||$35||$315|
|Unspecified Transportation Financing||$20||$28||$29||$31||$32||$328|
|Interest Cost of Unspecified Policies||$0||$1||$3||$5||$9||$133|
|Possible Deficit Levels||$1,185||$858||$770||$730||$832||$9,490|
|Deficit as Percent of OMB GDP||7.5%||5.1%||4.3%||3.9%||4.2%||4.8%|
|Deficit as Percent of CBO GDP||7.6%||5.2%||4.5%||4.0%||4.3%||4.9%|
|Memo: OMB's Deficit Projections as a Share of GDP||7.0%||4.6%||3.6%||3.2%||3.3%||3.7%|
*Adjustments made by taking difference in current law baseine deficits between CBO and OMB.
If we were to switch to CBO’s baseline projections (but continue to assume OMB’s policy costs and savings), and omitting unspecified savings, the deficit picture in the President’s budget would be quite different. Rather than running $7.2 trillion of deficits over the decade, it would be running $9.5 trillion.
And on top of this, by 2021 OMB’s nominal GDP numbers are about 3.5 percent percent higher than are CBO’s. This means that any given level of deficit, divided by that larger GDP, will by definition result in a higher deficit-to-GDP ratio. As a result, deficits could be as high as 4 percent of GDP (as opposed to 3.2 percent under OMB’s projections) in 2015 and 5.0 percent (as opposed to 3.1 percent) by 2021.
So what does this mean for the debt? Well, the President’s budget claims to hold the debt between 76 and 77 percent of GDP from 2013 through 2021. That level is too high, but at least is stable for a while. If we assumed the CBO baseline as the starting point, took away the unspecified savings, and used CBO’s GDP numbers, the debt would look far worse. It would eclipse 77 percent in 2013, 80 percent in 2016, and reach 87 percent by 2021.
That’s a debt trajectory we can’t afford.
Continue to check back here as we close out the week with more analysis  of the President's FY 2012 budget proposal.