CBO's 2011 - 2021 US Budget Deficit Projections

From the CBO summary, "The Budget and Economic Outlook: Fiscal Years 2011 to 2021":

sharply lower revenues and elevated spending deriving from the financial turmoil and severe drop in economic activity—combined with the costs of various policies implemented in response to those conditions and an imbalance between revenues and spending that predated the recession—have caused budget deficits to surge in the past two years. The deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product (GDP), the largest since 1945—representing 10.0 percent and 8.9 percent of the nation’s output, respectively.

For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO’s baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

Read the complete CBO summary here.

Read the complete 172 page CBO report here.

Repeal Of The New Heathcare Law Will Not Increase The Deficit, Just As Its Passage Did Not Reduce The Deficit, Despite CBO's Opinion To The Contrary

Despite CBO's projections to the contrary, repeal of Obamacare will not increase the deficit, just as the original enactment of the new healthcare legislation did not reduce the deficit.

CBO projected expected revenues and costs of the new healthcare legislation under the assumption of a static economy, and it will use the same methodology to project the revenues and expenses of a repeal of Obamacare.

CBO does not model tax revenues. It uses the projections of the Joint Committee on Taxation (JCT). JCT uses a static model of the economy when modeling the effects of tax rates on tax revenue. JCT assumes individuals and corporations minimize taxes and modify behavior, but tax law changes do not change the projected growth rates of the US economy.

From page 19 of "Inside the JCT Revenue Estimating Process" JCT states:

"Macroeconomic" Revenue Estimates

• standard JCT estimate incorporates behavioral responses in projecting tax revenues, but assumes that these tax and behavioral changes do not in turn ‘move the needle' of the entire US economy
• This is termed the "Fixed GNP Constraint"
• Generally assumes that total labor supply and investment are fixed
• For example, we assume that a surtax on labor income will not cause taxpayers to retire early, or simply to work less hard

Unrealistically, CBO, in relying on JCT tax revenue estimates, uses estimates that the new taxes and new mandated employer costs in the new healthcare law do not change GDP growth, consumption, workforce participation rates, tax revenue estimates, or capital investment amounts. All of which will probably be lower under the new healthcare law due to increased taxes, penalties, and increased employer costs of employees.

When macro-economic economists model tax or price changes, they use more realistic models like dynamic stochastic general equilibrium (DSGE) models and not static models. DSGE models attempt to accurately reflect behavioral changes caused by tax, cost and price changes. DSGE models of the new healthcare reform law would show that the new law slows economic growth, slows employment growth, and that tax revenue will be lower than expected.

In other words, a more accurate macro-economic model of the US economy would show that repeal of the new healthcare law would increase GDP growth, increase capital investment, increase workforce participation, increase consumption and increase tax revenues. Repeal would not increase the deficit and may actually reduce the deficit more than the new healthcare law due to stronger economic growth after repeal.

See my two earlier posts about the shortcomings of CBO deficit estimates when there are tax changes:

"ObamaCare Highlights Weaknesses Of CBO Cost Estimating Process"

"A Bias Towards Tax Increases In NY Times, CBO, JTC Budget Calculators"

CBO's Analysis Of Extending The Bush Tax Cuts, Reducing The Payroll Tax And Extending Unemployment Benefits: Difficult Choices Between Current Or Future GDP Growth

On September 28, 2010, CBO Director Doug Elmendorf presented to the US Senate Budget Committee a comprehensive analysis of the macroeconomics effects on employment, GDP and the deficit of various fiscal policy choices, including full and partial, temporary and permanent, extensions of the Bush tax cuts, reductions in the payroll tax and extending unemployment benefits.

I am republishing the weblinks to that full testimony, summaries, with and without charts, and an accompanying slide show below.

Following is a quote of the key assumptions from page 5 of the full CBO report. It goes to the core of the political and economic differences between those who want the deficit reduced now and those want to reduce taxes or increase government spending now. Lowering taxes or increasing deficit spending now will increase near term demand and GDP at the expense of higher future deficits, which will crowd out future private investments and capital spending and reduce future GDP. We are in a situation in the US where current economic policies must carefully thread a needle. We need to increase current employment and GDP, but we must be very careful to choose policies that will not seriously damage future economic growth, employment and GDP as we do it.

CBO expects that economic growth in the near term will be restrained by a shortfall in demand. All else being equal, lower tax payments increase demand for goods and services and thereby boost economic activity. In contrast, the models used to estimate the effects on the economy in 2020 and later years focus on the policies’ impact on the supply of labor and capital, because CBO believes that economic growth over that longer horizon will be restrained by supply factors. All else being equal, lower tax revenues increase budget deficits and thereby government borrowing, which crowds out investment, while lower tax rates increase people’s saving and work effort; the net effect on economic activity depends on the balance of those forces.

The full testimony of the analysis, with charts, is available here.

The summary with charts from the CBO study is available here.

The summary without charts is available here.

The accompanying slide presentation is available here.

Increasing The Top Tax Rate Does Not Increase Tax Revenues: Lowering The Top Tax Rate Increases Tax Revenues

From The Wall Street Journal, "There's No Escaping Hauser's Law: Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie" by W. Kurt Hauser:

Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this "Hauser's Law."


***On average, GDP has grown at a faster pace in the several quarters after taxes are lowered than the several quarters before the tax reductions. In the six quarters prior to the May 2003 Bush tax cuts, GDP grew at an average annual quarterly rate of 1.8%. In the six quarters following the tax cuts, GDP grew at an average annual quarterly rate of 3.8%. Yet taxes as a share of GDP have remained within a relatively narrow range as a percent of GDP in the entire post-World War II period. 

Read the complete Hauser piece here.

Reducing the deficit and debt will not be as easy as passing legislation to increase taxes.

As Hauser describes in his article and as known from other economic research, raising the tax rate produces lower than expected tax revenues and also lowers future GDP. People shift their actions to reduce tax payments, increase tax deductions and generate more tax free income from tax free investments. Higher tax rates lower the rate of capital investment, which reduces future GDP and taxable income.

The Bowles-Simpson draft deficit reduction plan envisions tax revenue rising to 21 percent of GDP. As Hauser notes, 19 percent of GDP is the norm as tax rates rise and fall over the last six decades.

The only way to substantially increase tax revenues is through strong economic growth and strong economic growth is more likely in a low top marginal income tax environment.

The US is unlikely to solve its deficit problems through higher tax rates. The US will find itself needing to make substantial cuts to its spending programs in order to get its fiscal house in order. Simultaneously it will need to lower tax rates to spur economic growth.

Cutting government programs and government spending while lowering top tax rates will not be an easy sell for politicians, but it is the right way to eliminate the deficit and increase GDP growth.

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• Economic View: Taxing the Rich: It's All Relative (nytimes.com)
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• GOP Urges Slashing Corporate Taxes as Profits Hit Record (crooksandliars.com)

Draft Proposal Of Obama's Debt Commission Released With $200 Billion Illustrative Savings

President Obama's bipartisan commission on reducing the federal debt, officially known as the National Commission on Fiscal Responsibility and Reform, released it draft proposal for government fiscal responsibility on November 10, 2010.

The draft report is available here, on Scribd or embedded below.

The Commission also provided illustrative examples of $200 billion of fiscal savings. The examples are available here, on Scribd, or embedded below the Draft Proposal below.

Fiscal Commission Draft Proposal Nov 10 2010

Fiscal Commission Illustrative Fiscal Savings

Related articles

• Deficit panel co-chairs recommend $200 bln in cuts (marketwatch.com)
• U.S. fiscal year began with $140-bln deficit (marketwatch.com)
• Fiscal commission wraps up work early (washingtonmonthly.com)
• Commission to Call for Deep Cuts in Spending, Tax Breaks (politicalwire.com)
• Fiscal panel report proposes spending caps, tax reform, Social Security cuts (thehill.com)
• Obama panel offers $4 trillion in deficit cuts (money.cnn.com)

CBO Elmendorf: Presentation to Macroeconomic Advisers: Fiscal Policy Choices in Uncertain Times

From CBO Director Doug Elmendorf's presentation to Macroeconomic Advisers, "Fiscal Policy Choices in Uncertain Times" on September 16, 2010:

• The economic recovery will probably proceed at a modest pace—leaving total output well below its sustainable level, and the unemployment rate well above its sustainable level, for a number of years.


• In CBO’s judgment, the available monetary and fiscal tools, if applied at sufficient scale, would improve economic conditions during the next few years—though with costs and risks in the medium and long term. Policymakers need to address those trade-offs.


• To avoid worsening the medium-term and long-term imbalance between federal spending and revenue, any policies that widened budget deficits in the near term would need to be accompanied by specific polices to reduce spending or increase revenue over time.

Read the CBO director's complete presentation here or below.
Elmendorf Fiscal Policy Choices in Uncertain Times

Elmendorf Fiscal Policy Choices in Uncertain Times

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Almost Half The US Receives Entitlement Benefits

From The Wall Street Journal article, "Obstacle to Deficit Cutting: A Nation on Entitlements" by Sara Murray:

As recently as the early 1980s, about 30% of Americans lived in households in which an individual was receiving Social Security, subsidized housing, jobless benefits or other government-provided benefits. By the third quarter of 2008, 44% were, according to the most recent Census Bureau data.

That number has undoubtedly gone up, as the recession has hammered incomes. Some 41.3 million people were on food stamps as of June 2010, for instance, up 45% from June 2008. With unemployment high and federal jobless benefits now available for up to 99 weeks, 9.7 million unemployed workers were receiving checks in late August 2010, more than twice as many as the 4.2 million in August 2008.

Still more Americans—19 million by 2019, according to the Congressional Budget Office—will get federal aid to buy health insurance when legislation passed this year is implemented.

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Was CBO Pressured During The Health Care Debate To Hide Important Information From Congress?

[UPDATE: On September 14, 2010, Keith Hennessey retracted his post that CBO was pressured. See Hennessey's retraction "Retracting one of my CBO health care posts".]

Keith Hennessey thinks that the Congressional Budget Office was pressured to hide important information during the health care bill debate. CBO's recent data (PDF page 24, document page 6) shows that the new health care law will increase federal entitlement spending by $401 billion over the next decade, and will increase taxes by $525 billion over that same time period. Hennessey writes in his blog:

Based on CBO’s normal scoring practices and the intense scrutiny of both CBO and this legislation, this cannot possibly have been an oversight. I would bet heavily that CBO was pressured not to show this information.

If I’m right, CBO should have resisted this pressure and provided a picture that was both more complete and consistent with how they usually score legislation.

Deficits matter. So do spending and revenues. If they remain in place, these laws will make government spending $401 B larger this decade. By reducing the budget deficit through tax increases, these bills will shift some of the fiscal burden from the future to the present. By increasing government spending, these bills will increase the cost of government on the private sector that pays for it. That latter point is an important piece of information that Congress should have had when they voted.

I am generally a fan of CBO, and please don’t group me with the bashers who say they did everything wrong. This, however, was a failure.

Keith Hennessey served as Deputy Assistant to the President for Economic Policy and Deputy Director of the National Economic Council at the White House from August 2002 through the end of 2007. In 2008 and the first three weeks of 2009, he was Assistant to the President for Economic Policy and Director of the National Economic Council, a position now held by Dr. Larry Summers for President Obama.

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