Economy and Jobs Watch: Deficit Outlook

The 2004 deficit is set to grow to nearly $500 billion, and the 10-year deficit is likely to be nearly $6 trillion, a new OMB Watch analysis shows.

The 2004 deficit is set to grow to nearly $500 billion, and the 10-year deficit is likely to be nearly $6 trillion, a new OMB Watch analysis shows.

The Congressional Budget Office (CBO) August 2003 Budget and Economic Update shows a baseline projection of a $401 billion deficit for 2003, and a $480 billion deficit for 2004. The 10-year baseline projections show a $1.4 trillion deficit over the next ten years; however, as the report notes, the baseline is not intended to be a good predictor of actual budgetary outcomes (see “What is a baseline?” below). A better predictor of budget deficits under current policy would put the deficit for 2004 at $496 billion and the 10-year deficit at nearly $6 trillion.

See full report for more details.

While the current administration argues that these deficits are a result of September 11, the war with Iraq, and the 2001 recession; the CBO numbers show that the largest component of the most recent budget deterioration is legislation that reduced revenue – primarily the 2003 tax package (The Jobs and Growth Tax Relief Reconciliation Act).

A detailed breakdown of the CBO data shows that 48% of the budget deterioration for 2004 that occurred between March and August was due to legislative changes affecting revenue. When likely legislative changes are included, over the next ten years revenue reduction legislation accounts for 37% of the increase in the budget deficit forecasts.

Federal revenue is now at its lowest level in 40 years, just over 16 percent of gross domestic product.

See full report for more details.

What is a baseline?

Simply put, a baseline projection is a starting point for budget analyses. It gives a reference path for the current situation, against which a new policy proposal can be judged. Future policy proposals can then be measured as a deviation from an established baseline. A baseline is not necessarily the best, or even an accurate, prediction of actual budget outcomes.

The CBO, according to the law, must produce a baseline that is derived from the exact letter of the current law – and is explicitly not allowed to take into account likely or proposed legislation when determining the baseline.

The most recent CBO Budget and Economic Update (August 2003) put it this way,

“Actual budget totals, however, will almost certainly differ from those baseline projections. By statute, CBO's baseline must estimate the future paths of federal revenues and spending under current laws and policies. The baseline is therefore not intended to be a prediction of future budgetary outcomes; instead, it is meant to serve as a neutral benchmark that lawmakers can use to measure the effects of proposed changes to taxes and spending.

Such changes can significantly affect the budget outlook. … In addition to policy changes, factors beyond lawmakers' direct control--such as unexpected economic developments--can affect the budget outlook positively or negatively.”

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