The nonpartisan Congressional Budget Office (CBO) issued its biannual budget and economic outlook yesterday, describing in a quite forceful tone a changed perspective. Since March, “the budget outlook has worsened substantially,” yesterday’s report declared.
Much has happened since CBO’s March 7 analysis. War with Iraq began less than two weeks later. The war-related economic uncertainty delayed the long-awaited acceleration of U.S. economy activity. As a result, in addition to approving war-related supplemental appropriations, Congress and the White House also rightly enacted new tax-relief measures aimed at igniting a more robust expansion, which has always been the indispensable ingredient for reversing the nation’s budgetary problems. The origins of those problems, it bears recalling, can be traced to the bursting of the stock-market bubble and the subsequent evisceration of hundreds of billions of dollars in expected tax revenues.
CBO’s latest projections forecast a fiscal 2003 federal budget deficit of $401 billion (more than $150 billion higher than March’s estimate) and a 2004 deficit of $480 billion (nearly $300 billion above the projection issued five months ago). While both figures reflect nominal annual records, each, when measured as a percentage of the U.S. economy, is still smaller than the levels attained during the mid-1980s. In any case, failing to fund war costs is not an option.
For the 10-year period from 2004 through 2013, CBO projects a cumulative deficit of $1.4 trillion. That represents a change of nearly $2.3 trillion compared to the March forecast, which projected a cumulative $900 billion surplus over the same period. A major factor contributing to this massive 10-year change was the $80 billion in supplemental appropriations (mostly for the war in Iraq) that were added to the 2003 baseline. Even if much of those war-related costs prove to be temporary, current law requires CBO to assume that those costs continue for each of the next 10 years. That assumption accounts for almost $900 billion of the $1.4 trillion in additional spending projected in the August outlook.
On the other hand, CBO’s latest baseline projections also exclude several likely policy outcomes that the budget agency is forbidden to consider. CBO’s latest forecast does not include $400 billion to pay for a Medicare prescription-drug program because legislation has not yet been enacted. Extending expiring tax-cut provisions would add another $1.6 trillion to 10-year baseline deficit projections. Fixing the alternative minimum tax problem would add $400 billion more.
While CBO projects economic growth to accelerate to 3.8 percent for the 2004 calendar year, it expects the current unemployment rate of 6.2 percent to prevail, not only for the balance of 2003 but also throughout 2004. Such a development would not only bode badly for the labor market, but it could also present the White House with a major political problem, confirming yet again the wisdom of the advice to the administration cautioning against promises to deliver more on the job front than is practically possible.