A Forward Look at the Budget

How long can OMB's Rosy Scenario keep telling those pretty lies?

Most of the focus since the Office of Management and Budget's (OMB) release of the Mid-Session Review on July 15, 2003 has been on the $455 billion deficit projected for this fiscal year. Many have drawn attention to the fact that the new estimate is not just a marginal increase over its February estimate, but is 50 percent higher than the previous forecast.

Some have also focused on the "actual" deficit -- which is calculated by removing the Social Security and other trust funds since these are dedicated funds -- noting that it is the second highest deficit since 1946, with the highest being during the Reagan administration in 1983 when there was a public cry to reduce the deficit. When doing so, the 2003 deficit is projected to be 5.7% of the Gross Domestic Product; in 1983 it was 6%.

This is bad enough. But it misses the disaster in front of us. The OMB Mid-Session Review also announced that the deficit in FY 2004 will now jump to $475 billion. Then Ms. Rosy Scenario pays a long visit to OMB, allowing the White House agency to project declining deficits. Of course, OMB was dramatically wrong in its estimate this year - so why should projections for next year or the year after be any different?

In fact, a look at the economic assumptions OMB uses shows why the deficit projections are likely to be way low in the future:

  • According to OMB, the economy is expected to have a robust rebound. OMB projects GDP to increase on average 3.4 percent a year between 2004 and 2008. Even more amazing is that the economy is predicted to grow at a 3.7 percent clip next year, the highest that is assumed in the five-year projection.
  • OMB assumes that discretionary spending will only grow an average of 2.1 percent per year. OMB projects no sizable increases for homeland security, which is likely to put pressure on Congress as concerns about community vulnerabilities mount. Moreover, given planned increases in defense spending, the OMB numbers presumably mean there will be cuts in domestic programs. If that happens, it will likely put many Republicans out of a job since that those cuts are not very popular -- and if it does not, then the projections will be wrong.
  • Total spending is projected to grow by only 4.5 percent per year. Total spending includes the cost of interest payments on the debt, which keeps increasing because of the jump in annual deficits. (The interest payments alone will grow to be larger than the annual spending of the largest government departments.) Total spending also includes the cost of entitlement programs, which are expected to increase, despite OMB’s projections. Amazingly enough, these projections do not include the post-war costs of Iraq or Afghanistan.

On July 23, Congressional Budget Office (CBO) Director Douglas Holtz-Eakin told the House Budget Committee that the government faces huge spending demands, particularly from entitlement programs, over the long term. He noted that health entitlement programs, such as Medicare and Medicaid, alone could reach 20 percent of GDP. Using CBO assumptions about demographics, health care, and drug spending, he emphasized the exploding costs of the new prescription drug plan being debated in Congress: it could exceed $1 trillion in the second ten years and $2 trillion in the following decade.

Holtz-Eakin also noted that insured pension plans are under funded by an estimated $300 billion. This could result in new expenditures by the government to cover costs similar to what happened in the 1980s with the savings and loan debacle. This is just one example of unpredictable costs over the long term.

As Sen. Kent Conrad (D-ND) has repeatedly noted, it is important that the fiscal house finds order because around 2013 baby boomers will begin retiring, further driving up government costs. He also points out that the costs of the tax cuts explode after 2011. Goldman-Sachs and other independent analysts forecast deficits exceeding $500 billion a year when the baby boomers start to retire.

Several members of Congress, such as Rep. John Spratt (D-SC), the ranking Democrat on the House Budget Committee, have pointed out that the Bush tax cuts were the wrong policy.

The reappearance of Rosy Scenario at OMB is an attempt to disguise the real effect of the tax cuts during the coming decade. While OMB is trying hard to keep up appearances with Rosy's help, the real magnitude of the federal budget's deterioration will be difficult to keep under wraps for much longer.

back to Blog