Both CBO and OMB put out their updated budget forecasts this morning. Getting past all the confusion about baselines, the news is grim. OMB projects more than $9 trillion in cumulative deficits over the next decade if the President’s agenda is enacted. A few things to keep in mind as you wade through the carnage.
1. Pay no attention to short-term deficit projections. They are likely to wildly miss the mark, given the still-unstable economy and how little can be predicted about how and when financial institutions will repay federal bailout funds. Besides, while the economy may have bottomed out, this is not yet the time to either raise taxes or cut spending. With luck, we might be able to seriously address fiscal imbalances a year from now. By then we’ll know a lot more about what the recession meant to the fisc.
2. The long-term policy deficits projected by OMB may be optimistic. For instance, they assume more than $600 billion in new revenues from auctioning climate change pollution permits. Yet, the House has already agreed to give away 85 percent of those permits, and the Senate could well give away the rest. The White House planned to use much of that money to extend the Making Work Pay tax credit. Now it will either have to ditch the credit after 2011, find another way to pay for it, or add another half-trillion to the long-term deficit.
3. Some Administration critics are saying these huge deficits are a reason to abandon efforts to reform health care. In fact, they describe exactly why we need to address the explosion of medical costs. Yet, although the White House includes $600 billion in health savings in its budget update, these are the elements least likely to survive the congressional meat-grinder.
4. Even once the economy gets back on its feet, the White House projects spending will settle in at about 23 percent of Gross Domestic Product. That is a substantial increase from the average of 19 percent or so in recent decades, and significantly more than estimated tax revenues. We can try to run deficits of 4 percent of GDP as far as the eye can see, but only if the Chinese continue to help out.
5. Finally, take a look at both CBO and OMB forecasts of long-term trend economic growth: OMB figures it will be roughly 2.5 percent once all the effects of the recession and the stimulus package wash out. CBO is even more pessimistic. These forecasts are not new, but they are worth keeping in mind. Over the next decade and beyond, the economy will grow significantly more slowly than in recent years, in large part because many more Americans will be retiring than joining the workforce. And that will put growing pressure on fiscal policy.
When Budget Director Peter Orszag and others talk about medical costs being unsustainable, this mismatch between health spending and economic growth is exactly what they have in mind. In the decade 1998 to 2007, both Medicare and Medicaid grew at more than 7 percent per year. And you don't need to be an economist to understand what will happen if medical costs keeping rising at 7 percent while the resources to pay for them grow at only 2.5 percent.
