Friday, January 28, 2005

CBO's Budget Outlook

The most interesting piece of economic news this week was the release of the Congressional Budget Office's "The Budget and Economic Outlook Years 2006 to 2015." This is a confusing document, largely because of the rules governing the way CBO specifies its baseline. Quoting from the report:

At first glance, the current baseline budget outlook may appear to have improved relative to CBO's previous projections, which were issued last September. The cumulative deficit projected for the 2005-2014 period (the 10 years covered by the previous baseline) has declined from $2.3 trillion to $1.4 trillion. However, because of the statutory rules that govern baseline projections, the current baseline omits a significant amount of spending that will occur this year--and possibly for some time to come--for U.S. military operations in Iraq and Afghanistan and for other activities related to the global war on terrorism. Likewise, those rules may have led the September 2004 baseline to overstate such costs.
The apples-to-apples comparison is presented in Summary Table 2, which shows that--apart from the treatment of last year's Iraq and Afghanistan Supplemental--the 10-year deficit has increased by $501 billion, with $371 billion of that change due to legislative changes. The explanation of the changes is:

Since September, when CBO issued its previous baseline, changes unrelated to the treatment of spending for activities in Iraq and Afghanistan have increased the cumulative deficit projected for 2005 to 2014 by more than $500 billion. Among the legislation that contributed to that increase was the Working Families Tax Relief Act of 2004. That law extended several tax provisions, including the 10 percent tax bracket, relief from the marriage penalty, and the increase in the child tax credit--thereby adding $146 billion to the 10-year deficit (excluding debt-service costs). In addition, supplemental appropriations for 2005 provide $11.5 billion in disaster relief for hurricane victims; extrapolating that budget authority through 2014 (following rules for the baseline) adds $94 billion to discretionary spending. Revisions to the baseline caused by changes in CBO's economic forecast were fairly small, reducing the projected 10-year deficit by $41 billion. Other, so-called technical revisions to the baseline--mostly involving revenues--increased that cumulative deficit by $173 billion.

So even knocking out most of the disaster relief (in addition to the military operations in the Middle East), the 10-year picture worsened by about $300 billion due to last fall's legislation. I'd call this a disappointing outcome for fiscal conservatism. I understand that we tend to regard taxes as "bad." But if taxes are bad, then deficits are surely worse, precisely because they are our children's taxes. Let's hope for better as the Budget makes its way through Congress later this year.

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Vader said...

It is excessive government spending that is bad. Resources used by government programs are resources that are not available for other uses.

Of course, how the resources are acquired by the government is not unimportant, since this establishes the incentive structure. Deficits are bad primarily because they are not as transparent as taxes, and those making the decision and those paying the cost are different groups - as you point out.

Or at least that's my take, as a non-economist.

Cent21 said...

You left out perhaps the biggest expected deviation from baseline:

Similarly, if all of the tax provisions that are set to expire over the next 10 years (except for one related to the alternative minimum tax) were extended, the budget outlook for 2015 would change from a surplus of $141 billion to a deficit of $282 billion.(4) Debt held by the public at the end of 2015 would equal 38 percent of GDP, and the 10-year deficit would total $2.7 trillion.
Also telling is that Congress downplays the gross debt and the on-budget deficit. The gross debt more accurately represents future obligations. Social Security will generate an increasing surplus for the next several years ... nearly enough to cut the unified budget deficit in half without any real improvement in the budget picture.

Anonymous said...

The last paragraph of this post is an example what makes Professor Samwick such a fool and a hack. He wants to hope for better, but any intellectually honest assessment of the situation would yield the obvious answer that this year will be no better and that is mainly because the Republicans (Samwick's party) controls the process.

Anonymous said...

Not worth fighting with a pig. The Republicans (and Samwick identifies himself as one) won't raise taxes. Samwick is a hack for "hoping" that something will change, but not fighting for it. My prescription:

1. Roll back the two tax cuts with the possible exception of some of the middle class/lower income tax cuts.

2. Eliminate taxes on corporate profits and tax capital gains as ordinary income. Tax all dividends as ordinary income.

3. Eliminate the inheritance tax. Classify any capital appreciation as income to the beneficiary and tax accordingly.

4. Increase significantly or remove the SS tax cap.

5. Eliminate Medicare and institute Universal Health Care for all Americans.

Andrew Samwick said...

And your definition of "fighting for it" would be exactly what?

Anonymous said...

Are you powerless to fight?

1. You could contribute to moderate Republicans who would increase taxes(I don't believe in such a thing, but you apparently do).

2. You could organize Republican economists for sanity who could propose increasing taxes.

3. You could testify before Congress in opposition to this administration's tax policies.

4. You could write an op-ed supporting higher taxes and restoring a more progressive tax structure.

Or you can continue to help this administration by seeking social security reform and using ridiculous infinite horizon estimates of the shortfall. It's your choice. Is the present shortfall in the general fund and the structural deficit that this administration has created worth fighting or not?