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The budget that President Obama proposed on Monday is highly dependent on economic growth forecasts for the next decade that are significantly higher than the Congressional Budget Office has projected. Economic assumptions can affect budget numbers in several ways. For instance, if the government collects more money in a better economy provided tax rates remain constant, which shrinks deficits. At the same time, deficits appear lower as a percentage of the economy, because the economy is larger.
I put together this quick table comparing the economic growth assumptions for the White House as compared to the CBO, and as you can see, the administration’s assumptions are higher in every year but 2015, when they’re the same. In testimony before the House Budget Committee yesterday, White House Budget director Jacob Lew argued that the higher forecasts were based on historical data from past financially-based recessions.
While these don’t look significantly different at first blush, they can make a huge difference when compounded over 10 years in an economy as large as ours. To demonstrate this, I did a back of the envelope estimate by plugging in the CBO’s GDP assumptions to the White House budget numbers (i.e. assuming revenue as a percentage of GDP is the same as the Obama administration predicts). This resulted in deficits that were $1.11 trillion higher than what the administration is projecting — in other words, it wipes out the entire deficit savings the administration is claiming its budget produces. If you just take 2021 as an example, merely swapping in the CBO’s GDP assumptions moves that year’s deficit from $774 billion and 3.1 percent of GDP to $935 billion, and 3.9 percent of GDP.
I should note by way of caution that there are a lot of moving parts in a budget and these should not be considered firm numbers. (For instance, a better economy means fewer people using government services, so it can affect spending on some programs such as unemployment benefits.) Before too long, wel’ll have a full CBO analysis of President Obama’s budget. But I thought it was worth emphasizing how much of a difference alternate economic assumptions can make in budgeting.
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