Last week, the Congressional Budget Office (CBO) released an updated Budget and Economic Outlook with new 10-year deficit projections for 2006–2015. The report estimated 10-year deficits to have dropped from $2.3 trillion to $1.4 trillion since last September, a 39 percent decrease. These conclusions, however, are very misleading. The CBO’s recent Budget and Economic Outlook is an update to an earlier analysis it released last September. By law, the CBO must only use currently enacted policies and laws in creating their budget outlook projections. The improvement in the budget deficit projections are a direct result of this requirement. When the report was released last September, the CBO included $115 billion per year through 2014 for supplemental defense expenditures in Iraq and Afghanistan in their projections. At the time, a supplemental appropriations bill for $115 billion had recently been approved. In their current estimates, the CBO includes no supplemental funding for Iraq and Afghanistan. Yet it is universally acknowledged that more supplemental funding will be requested by the Department of Defense and provided by Congress. The next supplemental request is expected to be at least $80 billion and it was recently reported there is likely to be a second supplemental request of at least another $80 billion before 2005 is over. The new CBO report acknowledges this discrepancy and includes adjustments to their previous projections in order to have a fair baseline to compare the two reports. When this adjustment is made, CBO concludes 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. Further, the 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 ($400 billion over 10 years), extending expiring tax cuts (up to $1.3 trillion over 10 years), and creating private accounts in Social Security ($1–$2 trillion). Given the potential costs of those policies, as well as projected increases in health care costs, it would be foolish and irresponsible for policymakers to think they can sufficiently pay for those policies – and the nation’s other spending priorities – while attempting to make Bush’s tax cuts permanent. Yet that is exactly what the administration is proposing. Doing so would explode deficits far beyond any projections we are seeing today. For good articles on the Budget and Economic Outlook released last week, 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 OMB Watch 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 predicted by the CBO.