Do not read the new CBO budget projections by the dark of night. Instead, pick a bright sunny day and keep a significant other or perhaps a pet by your side. A good stiff drink wouldn’t hurt. If Stephen King were a budget wonk, A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook would be his kind of book.
The headline is CBO’s projection that the deficit will hit $1.8 trillion this year under President Obama’s policies. That’s a deficit of more than 13 percent of GDP—twice as large as any annual deficit since 1946. But that’s far from the scariest number in this report. Far more troubling to me is what will happen after the economy recovers and fiscal policy returns to what I suppose will be the New Normal.
This year, thanks to a combination of the 2001 and 2003 tax cuts, the Obama stimulus, and the awful economy, revenues are expected to plunge to about 15.4 percent of GDP. By 2012, once CBO figures the economy has returned to trend growth, revenues will settle back in at between 18 percent and 19 percent of GDP. That is roughly where they have been for decades. Obama could, of course, raise more money than that, but as blogger Diane Rogers notes at economistmom.com, he'd rather permanently extend most of those 2001 and 2003 Bush tax cuts.
And spending? Here's where you'll need to pet your dog, or pour another tall one. The various bailouts, the stimulus, and ordinary countercyclical spending will drive federal outlays this year up to more than 28 percent of GDP—a number not seen since World War II.
Predictably, those expenditures will also fall once the economy revives and everybody who needs a bailout will presumably have received one. But even then, spending will settle in at an average of more than 23 percent of GDP through 2019. By that year, we will be spending more than $5 trillion a year—more than 56 percent on entitlements and almost 16 percent, or $800 billion, on interest. Let me say that again, by 2019, we will be spending more than $800 billion annually on debt service alone. That is as much as we spent on the entire government as recently as 1983. Will that be manegable? You'd have to ask the Chinese or our other creditors.
It is true that ten-year budget forecasts are not much more than educated guesses. But this is the best we have, and it doesn’t take TPC’s Big Computer to figure out that we’ve got a problem.
