Thursday, January 25, 2007

Budget Forecasts

The CBO has released its annual comprehensive forecast of the federal budget balance for the next ten years. The White House and its allies are trumpeting the figures as illustrating that Bush's policies will lead to a balanced budget by the year 2012. There are just a couple of problems with that conclusion.

First, it's worth making the oft-repeated point that the budget deficit reported in the newspaper headlines is not necessarily the number that matters. Or at least, it probably shouldn't be. That's because the "headline" figure (which is the one that is causing the White House to rejoice because it will move from deficit to surplus in the year 2012) includes the Social Security surplus.

Since that surplus is essentially a place-holder for future liabilities that the US government is going to have to face down the road (when it has to pay SS benefits to baby-boomer retirees), a more comprehensive picture of the government's fiscal picture should focus instead on what the budget deficit would be excluding the SS surplus -- a concept called the "on-budget deficit". As the figure below shows, if you exclude the SS surplus, the on-budget (or "general fund") federal government balance will remain negative for the complete forecast range (see PGL for more on this).

By the way: many economists, including me, would be thrilled if the press shifted their emphasis from the unified budget balance to the on-budget balance. But I'm not holding my breath.

But regardless, it is true that even the on-budget balance shows a marked improvement between the years 2010 and 2012. Why is that? Simple: because during those years the Bush tax cuts are currently slated to expire. The CBO forecast assumes that they will.

But what would happen if Bush got his wish and those tax cuts were made permanent? The next chart tells the story. Instead of the current CBO projection of a deficit of $85 billion in 2012, the deficit would be about $460 billion -- quite a difference.

It will be interesting to see how Bush's 2008 budget (due out shortly) manages to hit their stated target of balance in 2012 while simultaneously making Bush's tax cuts permanent. It's true that their goal is not really a balanced general fund government budget, but rather just a deficit that's smaller than the SS surplus... but squaring this circle will take some pretty heroic assumptions on their part. I'm curious to see which ones they'll make.

One final note: not long ago, in early 2005, Bush was raising the alarm over the Social Security "crisis". Here are some typical comments, from a speech Bush gave on April 21, 2005:
Social Security system [sic] three years from now will start heading into the red. In 2017, Social Security will start paying out more in benefits than it collects in payroll taxes. A pay-as-you-go system, money coming in, money going out. More money will be going out than coming in, in 2017, and every year thereafter the situation gets worse.
Despite this slightly mangled presentation, the gist of Bush's point was one repeated ad nauseum during the spring of 2005: the Social Security trust fund will stop accumulating reserves in the year 2017, so it is imperative to act to fix this "crisis".

Now take another look at the top chart. Clearly, the CBO does not expect the SS trust fund to stop accumulating reserves in 2017. In fact, the CBO expects the SS trust fund to add over $250 billion to its reserves in that year alone.

Yes, there is an upcoming funding gap for Social Security. But the problem is moderate in size, is not imminent, and keeps moving farther into the future. I just wish the same could be said about the problems with the US's health care system...

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