The headlines are that CBO’s budget outlook says that deficits will total $7.1 trillion over the next ten years, which is “almost $2 trillion less” than what the Administration says they’ll be ($9.051 trillion). But the CBO outlook is based on current law, before accounting for any of the policies President Obama has proposed in his budget. If you compare “apples to apples” CBO shows in this table that OMB’s outlook is actually more optimistic than CBO’s: $6.259 trillion for OMB (based on current law) versus $7.137 trillion for CBO.
Is it coincidence that the difference between the CBO baseline and the Administration’s budget forecast (with their policy proposals) is just about $2 trillion? No. That’s just about the cost of extending the Bush tax cuts that President Obama has proposed to extend, which CBO previously scored at $1.9 trillion (in their June report), not including debt service. (Now CBO (and the Joint Committee on Taxation) might score it as slightly less, because their estimate of the cost of extending all of the tax cuts has come down slightly (from $2.4 trillion to $2.3 trillion), now that the revenue forecast has come down yet again. More on that later.)
UPDATE 12:30 pm: here are some facts from the CBO report:
- CBO baseline (2010-19), August: $7.137 trillion deficit — up from $4.441 trillion in March, a $2.7 trillion deterioration.
- Biggest reasons for deterioration of CBO outlook since March (in order of magnitude): higher net interest (+$943 billion), higher assumed defense spending (+$802 billion), lower revenues (-$372 billion), and higher non-defense discretionary spending (+$272 billion). (Those four categories account for nearly $2.4 trillion of the $2.7 trillion deterioration.)
- The change in the net interest estimate is due to both a higher forecasted ten-year Treasury rate for the next two years, plus the CBO’s anticipation that “the Treasury will conduct future borrowing using longer-term securities”–so a composition effect as well. This seems a plausible adjustment to the CBO forecast.
- The higher defense spending is due to CBO’s practice of extrapolating new supplemental funding, so is probably an overestimate. (Note that Concord will remove this assumption of permanently higher defense spending in our “plausible baseline”–forthcoming later today.)
- The lower revenues are just a continuation of the deterioration in the federal revenue base that CBO has well documented. Since last September (less than a year ago), CBO’s ten-year revenue outlook has declined by more than $3 trillion due just to deterioration in the economic outlook. (Legislative changes since September have contributed only about $250 billion toward the ten-year revenue decline.) Remember that these adjustments to the revenue outlook are based solely on current law, without any of the expiring tax cuts (including the Bush tax cuts) extended.
- In the CBO’s adjustments for policy alternatives not included in their baseline, the temporary tax cuts included in the recovery package are a big new factor. Back in January, the extension of temporary tax cuts added $588 billiion to the ten-year deficit (without debt service); now they add $1.794 trillion to the deficit (without debt service), largely because of the new temporary tax cuts included in ARRA, most of which are supposed to be “stimulus tax cuts” and so perhaps can be more realistically expected to expire and not be permanently extended. But one of those temporary tax cuts in ARRA was the temporary extension of the Making Work Pay credit which the Obama Administration proposes to extend permanently in their budget. (The Administration proposed to pay for that extension–and not deficit finance it–with climate policy revenues.)
- Compared with the Obama Administration’s “BEA” (pre-policy) baseline (”apples to apples”), CBO is more pessimistic about ten-year revenues (projects $2.190 trillion less in revenues than OMB), but CBO is more optimistic than OMB about spending (projects $1.313 trillion less in spending than OMB). On net, CBO’s baseline forecast shows $878 billion more in deficits than OMB’s pre-policy baseline, although they show lower deficits in the earlier part of the budget window (2010-2013) and higher deficits in the latter part (2014-2019). In 2019, CBO forecasts a deficit that is $269 billion worse than what OMB forecasts (pre-policy): CBO’s 2019 deficit is $722 billion (3.4 percent of GDP) versus OMB’s pre-policy deficit of $453 billion (which would be just under 2 percent of GDP using Administration’s more optimistic forecast for 2019 GDP). (Under Obama budget proposals, OMB says the 2019 deficit would be $917 billion, or 4.0 percent of GDP.)