The Truth Behind CBO's Ten Year Deficit Projections

In September of 2004 the Congressional Budget Office (CBO) estimated 10 year deficit levels to be $2.3 trillion. Their recent Budget and Economic Outlook shows this 10 year deficit projection improving, as they now predict deficit levels to be $1.4 trillion over the next ten years. These numbers are misleading. The reason for this improvement is because in their previous report, the CBO included $115 billion per year through 2014 for supplemental defense expenditures in Iraq and Afghanistan. In their current estimates, the CBO includes no supplemental funding for Iraq and Afghanistan. This discrepancy exists because CBO is required by law to base their projections only on current law. The CBO report acknowledges this and includes adjustments to their previous projections in order to have a fair baseline to compare the ten year deficit. When this adjustment is made, CBO reports that ten year deficit levels will actually increase by half a trillion dollars, or 0.3 percent of GDP; three-quarters of this increase is due to legislation surrounding the extension of tax cuts. Similarly, CBO projections fail to take into account some costly policies that are widely expected to become law in the near future. These include:
  • reforming the Alternative Minimum Tax;
  • extending expiring tax cuts; and
  • creating private accounts in social security. Given the potential costs of the policy issues listed above, as well as projected increases in health care costs, it would be foolish and irresponsible for policymakers to think they can sufficiently meet those priorities while attempting to make Bush's tax cuts permanent. To do so would explode deficits far beyond any projections we are seeing today. For good articles on the Budget and Economic Outlook released yesterday, read this article in the Washington Post and this article from Bloomberg news. To read more about why CBO projections tend to underestimate the real picture of the deficit read this analysis by economist John Irons. Written last fall, Dr. Irons explains his take on why ten year budget deficits will most likely be much greater than any predictions from the CBO.
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    Divisions in Social Security Reform Widen

    The lack of a proposal from the White House on the President's specific plans for Social Security reform has continued to raise doubts and widen the divide of consensus on the proper way to approach this issues. In yesterday's Washington Post, House Ways and Mean Committee Chairman Bill Thomas (R-CA) was quoted as saying the President's plan would be a "dead horse" upon arrival in Congress and that it "cannot, given the politics of the [Congress]" win passage. Representative Thomas is one of the most powerful Republicans concerning tax policy and will have a huge influence on the fate of Bush's domestic agenda in his second term - particularly Social Security reform. Also recently released, a new analysis by Center for American Progress/The Century Foundation senior fellow Ruy Teixeira on recent polls concerning Social Security. It seems not only has Bush lost Congress, but he continues to be unable to sell the American public on his policies.

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    Washington Post Series On Social Security

    In an editorial yesterday, the Washington Post proclaimed that it plans to offer an occasional series of discussions on social security, in light of the recent onslaught of attention being devoted to the issue. The first article in the series can be read here. In the series on social security, the Washington Post hopes to explore many questions, including the following: What is the role of Social Security in today's retirement system? What is the size of the shortfall? What are the alternatives for addressing it? What are the risks and potential benefits of private accounts? How have they worked in other countries? Check the Post in the upcoming weeks for in depth coverage on the subject. Columnist Paul Krugman of the New York Times also continues to regularly discuss his feelings on social security reform in frequent op-eds. The latest can be read here.

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    Britain's Go At Pension Privatization

    With all of this talk about social security, many analysts and politicians are looking to examples from abroad to either back their proposals or disprove others' proposals. One particular case getting a lot of attention is Great Britain. In her American Prospect article, "A Bloody Mess," author Norma Cohen discusses Britian's go at pension privatization approximately twenty years ago. In fact, it appears that there are basic similarities between what Britain enacted, and what President Bush may propose in the very near future; that is, a cut in guarenteed benefits with the option for beneficiaries to make up for those cuts by earning high returns on private accounts. Check out the article to see why there is now growing consensus in Britain that the privatization policy must be reversed. Paul Krugman also discusses the issue in a column today titled "The British Invasion."

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    Guide to the Federal Budget

    The Coalition on Human Needs has recently released a brief and informative report that discusses both the budget process what is ahead for us in 2005. This report is helpful for those who want to brush up on their understanding of the budget process, government actions, and why we are running a deficit. Check it out here.

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    Who Benefits From Tax Cuts?

    Bush's first term was marked by the passage of excessive tax cuts. This year alone, the cost of those tax cuts will be $ 215 billion. Roughly $ 47 billion of that amount will go to the top 1 percent, or in other words a group of people whose average income is about $ 1 million per year. These tax cuts are not paid for, and are significantly more costly than the war in Iraq, Medicare drug benefits, and the projected social security shortfall. It is no secret that our deficit and national debt are disturbingly high and not on track to be responsibly repaired any time soon. Adding to the deficit burden is the cost of these excessive tax cuts. How will the administration choose to deal with this? When the President releases his budget in early February, we may very likely see that his solution will be to freeze or significantly cut non-defense discretionary spending. Another way to view non-defense disretionary spending is to think of it as services for people paid for by the federal government. This means education, medicaid, medicare, child care, environmental protection, veterans' health care, housing and many other programs. The administration and Congress seem to think that taking away from these programs to give $ 47 billion back to the rich this year is how to solve our fiscal problems by "growing the economy." Taking away necessary and vital programs used and depended upon by millions and millions of people in order to give a sizeable chunk of that money to the rich will not grow anything except the size of the gap between the rich and the poor in this country. Check out this link for an informative editorial in today's Washington Post.

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    Job Growth Numbers

    Jobs growth data for December 2004 was recently released. Below are the facts. This data comes from the Economic Policy Institute's JobWatch web feature. Click here for background documents.
  • Job creation failed to meet the administration's projections in 15 of the past 18 months.
  • Job growth over the last 18 months has fallen short by 1,703,000. This number is more than one-third less than the number of jobs the administration said would be created, even without the tax cuts.
  • The administration expected the tax cuts to generate 1.4 million jobs. This did not happen. The administration expected a little over 5.5 million jobs to be created between June 2003 and December 2004. In reality, only 2.4 million jobs were created.
  • Job growth in December of 2004 fell almost 150,000 jobs short of projected estimates for that month alone. In other jobs related news, an article in yesterday's New York Times discusses the fact that even though overall unemployment levels may have dropped, the number of workers who have been jobless for over a period of 6 months has remained very high. Six months is the point at which unemployment benefits run out for people, and as of November 2004, one in five unemployed workers were jobless for more than 6 months. A total of 3.6 million workers ran out of unemployment insurance last year, and according to the Times, this statistic is higher than it has been in at least three decades. President Bush and prominent members of Congress seem to believe that tax cuts will create more jobs. The numbers, however, do not appear to be lining up.
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    CBO's Monthly Budget Review

    On friday the Congressional Budget Office released their Monthly Budget Review, which includes key economic and budget figures from the first three months of fiscal year 2005. The report estimates that total federal outlays in the first quarter grew by close to 6 percent, which is similar when compared with first quarter growth in 2004. Both Medicare and Defense outlays, however, increased approximately 9 percent relative to levels recorded for this period last year. The government recorded a deficit of $ 114 billion for the first quarter, which is $ 16 billion lower than the deficit recorded for this period last year. Notably, spending is up for agricultural price supports, disaster assistance, and education programs. Outlays for both unemployment benefits and temporary fiscal assistance to states, however, have dropped significantly.

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    Insider Info on the Push for Social Security Reform

    Reporters at the Wall Street Journal and CongressDaily have obtained a memo written by Peter Wehner -- a senior official in the Bush administration. Besides stating that social security reform would be "one of the most significant conservative governing achievements ever," the memo notes that not only is the creation of private accounts key to reform, but benefits cuts would be key as well. The latter point is not one that the President has publicly said would accompany any social security reforms, although this memo makes it clear that it is on the minds of many. See this New York Times article to read about differing views on social security reform.

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    New Jobless Claims Jump in Last Week of 2004

    The Department of Labor reported today a suprising jump in new unemployment claims. For the last week in December, jobless claims rose by 43,000 to 364,000, the highest level since mid-September. While unemployment claims tend to be more volitle around the holiday season, the four-week moving average for claims, which is more stable, also rose to 333,000. The continuing surprising unemployment claims increases and disappointing job creation results continue to cast doubt on claims by the Bush administration that the 2001 and 2003 tax cuts are moving the economy forward and will eventually create move jobs. Analysts predict the economy will add 175,000 jobs in December - slightly more than needed to to keep up with population growth - but it is certainly possible that number may not be met. The Labor Department will release December job numbers tomorrow.

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