- The Washington Times - Thursday, September 17, 2009

ANALYSIS/OPINION:

The economic recession may be ending, but it is still cresting in the federal budget. Recent budget base line projections from the Congressional Budget Office contain the barest of good news: This year’s deficit may be slightly lower than earlier projected. However, later year deficit increases eclipse this “savings” by over a factor of 30. The deficit engine has not shifted into reverse, but overdrive.

CBO’s recent budget and economic update is not without its negative economic news, too. The economy, while expected to grow beginning in the second half of this year, will still not reach its potential until after 2013. Double-digit unemployment is expected to prevail next year and still be more than 9 percent in 2011. But the really hard reality is saved for the budget portion of the update.

“A large drop ($203 billion) in the estimated subsidy cost of the Troubled Asset Relief Program (TARP) dominates the reduction in projected outlays for 2009” from CBO’s March estimate. Yet this improvement, only translates into an overall $80 billion reduction in this year’s deficit from March estimates.

Behind this fig leaf of improvement lies the naked budget reality. Revenues are still down 17 percent and outlays up 24 percent from 2008 levels. As a result, the 2009 deficit is estimated to measure $1.6 trillion. Putting that figure into context, the previous eight years’ deficits totaled $2.006 trillion. If the projected 2010 deficit is added to 2009’s, the two-year deficit total would be almost 50 percent greater than the previous eight years’.

So what does this $2.7 trillion in additional estimated deficit over the next 10 years tell us? For one thing, that a loss of revenue is a very small portion of the problem. The drop in revenues accounts for less than 15 percent (13.8 percent, or $372 billion) of the increased deficit projection. The remainder is projected outlay increases.

To bring these staggering sums into more graspable terms, let’s compare them to the production of America’s economy. CBO estimates that revenues over the next 10 years will average 19.3 percent of gross domestic product. Over the last 40 years, revenues have averaged 18.3 percent. In contrast, outlays over the next 10 years will average 23.4 percent, compared to a 40-year average of 20.7 percent. On a deficit basis, revenues are projected to outperform relative to their historical performance, while outlays will significantly underperform.

The result of this spending preponderance is a structural deficit — a high level deficit becomes a permanent fixture in future budget projections. The deficit is estimated to average 4 percent of GDP over the next 10 years.

Over the last 40 years, it has averaged 2.4 percent. In fact during the next decade, the deficit drops as low as 3.1 percent on only two occasions (2015 and 2018). Why is that benchmark important? Last year’s deficit, in the first year of the current recession, was 3.2 percent of GDP.

While CBO envisions the economy recovering in the second half of this year, the budget is effectively projected to remain in recession over the next decade.

Certainly, there are caveats to CBO’s budget base line projections. These are not estimates of what will occur. They are estimates of what will occur if current economic, technical and legislative changes do not occur. And changes certainly will. For instance, almost $1.1 trillion of the increased outlay projections is due to this year’s $106 billion supplemental, which by its base line procedures CBO must assume recurs.

But there are also likely spending increases which CBO does not include — such as assuming future annual appropriations are not increased for inflation, which would result “in projections of discretionary spending that would be low, relative to GDP, by historical standards.”

On the revenue side, CBO also assumes that all of the 2001 tax cuts expire and that no effort is made to negate the AMT’s impact on the middle class, thus inflating revenues.

In short, as far as the deficit is concerned, these assumptions largely offset themselves in the big picture. That deficit picture is likely to be directionally and depressingly accurate, even if its elements alter somewhat.

The recession is likely to leave the nation with a federal deficit that never falls below the level it hit in this downturn’s first year. The recession shows that the federal government has become a powerful spending engine. Even slight taps on the accelerator send us fast and far down the deficit road. When the accelerator is floored, as this recession has done in less than two years, the speed and distance are breathtaking indeed and take us to a place we cannot afford to be.

J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.

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