EconomistMom.com

Only budget dweebs like me would find this new CBO report on “Measuring the Effects of the Business Cycle on the Federal Budget” fascinating.  The study estimates “cyclically adjusted” levels of revenues, outlays and deficits–those that would occur without the short-term fluctuations in the economy.  As the report explains it:

A budget measure that filters out cyclical factors is useful in several ways. For example, some analysts use such a measure to discern underlying trends in government saving or dissaving (that is, surpluses or deficits)…the measure helps analysts estimate the extent to which changes in the budget are caused by movements of the business cycle and thus are likely to prove temporary…

During cyclical slowdowns and recessions, revenue growth automatically declines and growth in outlays, for example to pay unemployment insurance claims or provide benefits under the Supplemental Nutrition Assistance Program (formerly food stamps), automatically increases. The opposite occurs with upturns in the business cycle. The cyclically adjusted deficit or surplus is calculated to illuminate the federal budget balance as it would exist in the absence of those automatic cyclical movements.

So what do we learn from CBO’s estimates of “cyclically-adjusted” revenues and outlays (shown in Table 1 on page 5 of the report)?  If we could remove the adverse effects of the recession, projected revenues would be higher (on the order of hundreds of billions of dollars each year) and outlays would be lower (on the order of tens of billions of dollars each year), so that projected deficits would be $300-$400 billion lower per year for fiscal years 2009 through 2011.

Some people argue we need not get all bent out of shape over the recently-worsening fiscal outlook, because recessions always have a way of worsening the budget situation, but recessions go away and eventually turn into expansions–which are always very good for the budget.  But these cyclically-adjusted figures don’t provide much comfort, because they show that although removing the effects of the recession would add $235 billion, $344 billion, and $314 billion to 2009, 2010, and 2011 revenues, respectively, those revenues would still fall far short of covering (even) cyclically(-downward)-adjusted outlays.  The report shows that in fiscal year 2011, unadjusted revenues are just 17.6% of GDP–below the (magical, mystical) 40-year historical average of 18.3%–but cyclically-adjusted revenues are 19.6%, well above it.  That assumes the 2001 and 2003 tax cuts have expired at the end of calendar year 2010, by the way, yet that 19.6% is still pretty far short of the cyclically-adjusted level of outlays (21.8%).  All this suggests that even when this recession goes away (literally rather than by cyclically-adjusted assumption), we still won’t have a revenue system that’s healthy enough to handle our expenses–and that’s even if the Bush tax cuts don’t get extended and turned into the Obama ones.

I’m not asking for taxes to be raised right now, but this CBO analysis shows it sure would be wise to plan for a change as soon as the economy’s on an upswing–because the upswing alone just ain’t gonna cut it.