OMB: CBO'S NEW NUMBERS

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Peter R. Orszag, Director

CBO released its re-estimate of the President’s Budget today. As expected, it showed a worsening of both the economic outlook and the fiscal picture since CBO’s January report.

Some will argue that CBO’s worsened projections are a reason for inaction in the face of today’s large economic and fiscal challenges. But differences in inherently uncertain long-term deficit projections are not a reason to ignore serious issues that have for too long been overlooked and that will only grow worse with time.

First, CBO’s projections, like any budget projections, are subject to a high degree of uncertainty. (Trust me…I know the former CBO Director quite well!) As an example of how much budget projections can shift, at this point last year, CBO was projecting a 2009 baseline deficit of $207 billion. It is now projecting a baseline deficit of about $1.7 trillion. CBO itself has estimated the margin of error around its 5-year deficit projection to be about 5 percent of GDP in either direction—which means the confidence interval around the 2014 deficit is plus or minus about $900 billion.

Also note that a key driver of the new CBO deficit numbers after 2014 are estimates about long-term economic growth—where CBO is somewhat more pessimistic than the consensus. For example, CBO projects long-term real economic growth that declines to 2.2 percent per year. Blue Chip pegs long-term real growth at 2.6 percent per year and the Federal Reserve forecasts long-term real growth of between 2.5 and 2.7 percent—the same as the Administration, which is projecting real long-term growth of 2.6 percent. These differences may not seem big, but over time they accumulate. And since the deficit is the difference between two much larger numbers—spending and revenue—even relatively small differences in assumptions can have a magnified impact on the deficit. (As an example, imagine that spending is $1,050 and revenue is $1,000, so the deficit is $50. If revenue declines by just 10 percent, the deficit triples to $150.)

Second, and more importantly, the CBO report only underscores the severity of the economic and fiscal crisis the Administration has inherited. There is need for urgent action to get our economy moving again, invest for the future, and put the nation on a sustainable fiscal path. The President’s Budget has proposed to do exactly this by addressing our big challenges head on:

• Invest in health care, since rising health care costs are a burden not only for the federal government but also for families, companies, and states;

• Invest in education and in our most precious resource—our people—through a major new commitment to early childhood education, scaling up innovative new programs in our schools, and opening up the doors to college;

• Invest in clean energy technologies like wind power and solar power, advanced biofuels, and fuel-efficient cars—investments that would help free us from foreign oil, create millions of jobs that pay well and can’t be outsourced, and make clean energy the profitable kind of energy; and

• Cut the deficit in half by 2013.

The new CBO numbers do not change our commitment to these goals or our ability to achieve them. I am confident that the budget resolutions both the House and Senate will start to consider next week will reflect these objectives.