Every year, the Congressional Budget Office releases its annual Budget and Economic Outlook for the next decade, as testified before the Committee on the Budget in the United States Senate. I thought that it would be an interesting exercise to see how accurate these predictions were, particularly in light of the release of the President’s budget which, of course, predicts better fiscal balance somewhere down the road.
Let’s start by looking at the older Outlooks first, starting with the 2008 version and looking at how the debt projections changed every year for two selected years, 2011 and 2018. As well, I’ll point out when the CBO projected a return to balance and/or which year was projected to have the lowest deficit over the decade-long period in the study.
You will notice just how optimistic the 2008 version was. The CBO predicted balance by 2012, with debt held by the public rising to no more than $5.827 trillion by 2011 and dropping to $5.050 trillion by 2018. As well, the annual deficit was projected to peak at $241 billion in 2010, falling relatively rapidly into balance over most of the decade. Things certainly looked great, didn’t they?
The 2009 version is not quite as optimistic as was the case in 2008. The Great Recession (i.e. TARP among other things) had massively impacted Washington’s ability to balance its books and the CBO totally eliminated any prediction of returning to fiscal balance over the decade with deficits falling to a minimum of $188 billion by 2018. Rather than a debt of $5.827 trillion in 2011, the debt was projected to reach $8.238 trillion, up 41.4 percent from their predictions one year earlier. Debt was projected to rise to $9.127 trillion in 2018, up 80.7 percent from their prediction just one short year earlier.
The 2010 version is even less optimistic than the 2009 version. Let’s look again at the CBO’s predictions for achieving fiscal balance and the debt in both 2011 and 2018. Once again, the CBO projected that Washington would not achieve fiscal balance by 2020 with the lowest deficit coming in at $475 billion in 2014. By 2011, the debt was projected to reach $9.785 trillion, up 18.8 percent from the previous year’s projections. As well, the debt was now projected to rise to $13.678 trillion by 2018, up 49.9 percent from the previous year’s projections.
The CBO, consistent with last year’s projections, threw optimism out the window again and projected that Washington would not achieve fiscal balance by 2021 with the lowest deficit coming in at $533 billion in 2014. By 2011, the debt was projected to reach $10.430 trillion, up 6.6 percent from the previous year’s projections. The debt was now projected to rise to $15.767 trillion by 2018, up 15.3 percent from the previous year’s projections and triple the projection of $5.050 trillion in 2008. As Rick Perry would say, "Oops!".
This year’s version is far more optimistic than what we have seen for the previous three years. While not showing a return to fiscal balance, the CBO projects that the deficit will reach its lowest level in 2018, dropping to a relatively small $196 billion. The deficit for the fiscal year 2011 was an "actual" now, reaching $1.296 trillion with the debt hitting $10.128 trillion, up 73.8 percent from what was projected back in 2008 and roughly what was predicted one year earlier. By 2018, the debt was projected to reach $13.801 trillion, down a substantial $1.966 trillion or 12.5 percent from the projections one year earlier. Most of this year’s improvement in fiscal balance is predicated on one thing; an increase in revenues as a share of GDP; rising from 16.3 percent of GDP in 2012 to 20.0 percent in 2014 and 21.0 percent in 2022. Between 2012 and 2014, revenues are projected to rise by more than 30 percent based on recent or scheduled expirations in certain tax provisions that have kept tax rates lower. As well, revenues are projected to rise relative to GDP because increases in taxpayers’ real income (after inflation) is expected to push more taxpayers into higher income brackets. Unless, of course, Congress rescinds the tax changes and then it’s back to the drawing board for the CBO because all bets are off.
It is interesting to look back in time and see just how inaccurate government fiscal projections are, even when looking from one fiscal year to the next. While our politicians love to assure us that all is well and that their projections "prove" that the debt situation is manageable over the long-term, we can see from this posting that their reality is far removed from our own and from that of the rest of the world.
From this posting, we can also see the impact of unanticipated events on Washington’s projections; the impact of the 2008 – 2009 contraction is still working its way through the federal government’s books. From that lesson, it becomes quite apparent that, if the world is entering either Part II of the Great Recession or another as yet unnamed contraction, all of the CBO’s projections will be worth about as much as their 2008 version in which they predicted a return to fiscal balance by 2012 and a debt held by the public of $5.75 trillion.
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