Obama’s Optimistic Budget Forecasts
Policy + Politics

Obama’s Optimistic Budget Forecasts

Low inflation, high growth ahead, but the administration insists this is no ‘rosy scenario’

For all the contrasts between the budget plan of President Barack Obama and those of his predecessor, George W. Bush, they share one striking similarity: both optimistically assume that the big deficit reductions they envision will come from economic growth rather than from belt-tightening or tax increases.

White House officials expect that growth will account for more than four-fifths of deficit reduction between now and 2015, and that Obama’s policy changes – a spending freeze in some areas and increased taxes -- will provide the remaining one-fifth.

That in itself is not unreasonable, budget experts say. A rebound in economic growth should lead to a recovery in tax revenues, while higher employment will lead to lower spending for “automatic stabilizers” like jobless benefits, food stamps and other safety-net programs.

But experts note that Obama’s budget blueprint means that deficit-reduction plans depend heavily on economic forces beyond his direct control. That leaves great uncertainty, given how far off the mark economic forecasts have often proven to be, and that the White House’s longer-run projections are more optimistic than those of private forecasters.

For this year, the White House economic projections are almost exactly in line with private estimates. The administration predicts that the economy will grow by 3 percent this year, that inflation will be only 1.9 percent and that unemployment will remain very high at 10 percent through the end of the year.

“The administration doesn’t want to get far from the consensus in either direction, but I expect this [Council of Economic Advisers] especially does not want to have a ‘rosier scenario,’” said Laurence H. Meyer, vice chairman of Macroeconomic Advisers, an economic forecasting firm. “This forecast looks reasonable to me.”

But the administration’s projections for the next several years are notably more optimistic than those of private forecasters. The White House budget assumes that growth averages almost 4 percent a year from 2011 through 2014, while private forecasters are expecting only about 3 percent. Indeed, White House economists estimated that, if the private forecasters are right, the deficit in 2015 would be about $200 billion higher than the official forecast.

The White House is also projecting that cost-of-living indices will remain relatively flat – an important assumption in Obama’s long-term budget strategy.

Analysts say the White House projections do not necessarily mean the return of “rosy scenario," a phrase coined during the Reagan administration to describe the use of optimistic assumptions to make the budget seem healthier than it really was. Indeed, the Obama White House’s unemployment prediction was more pessimistic than private forecasters'.

“We are economists and not soothsayers,’’ Christina Romer, chairwoman of Obama’s Council of Economic Advisers, cautioned last week. “All forecasts have to be understood to be subject to substantial margins of error.”

The Bush administration’s economic assumptions were wide of the mark more often than not. In its first budget plan for 2002, the Bush White House predicted that the economy would expand by 3.3 percent that year and that receipts would climb 2.6 percent. Even with Bush’s proposed tax cuts, the administration predicted that the budget would run a surplus of $231 billion in 2002 and even bigger surpluses for the rest of the decade.

As it worked out, gross domestic product climbed only 1.9 percent in fiscal 2002, receipts fell by about $45 billion and the budget ran a deficit of $103 billion. Overall debt rose about $4 trillion during the time Bush was in office.

Obama officials were stung by criticism last year, after they predicted that the president’s economic stimulus package would allow the unemployment rate to peak at about 8 percent. Instead, the jobless rate surged to 10 percent, even though the deep recession appears to have ended last summer.

Economic forecasts are often wrong, whether they come from the White House, the Congressional Budget Office or private prognosticators. Forecasters have a particularly bad record anticipating recessions, which play havoc with both tax revenues and spending.

In early 2008, the Bush administration initially predicted that the economy would expand by 2.7 percent, even though the National Bureau of Economic Research later declared that the economy had already slipped into a recession in December 2007. The economy expanded by 1.6 percent for the year, though the real impact of the downturn on tax revenues and spending did not hit until 2009.

In 2009, with the recession well under way at the year’s start, the economy contracted by about 2 percent – about what the Obama White House expected. But tax revenues dropped by a whopping 17 percent, or $420 billion. That was nearly twice as much as the administration expected, even allowing for the cost of temporary tax cuts to stimulate the economy.

Romer acknowledged that the White House is assuming faster growth than either the Congressional Budget Office or the private forecasters surveyed by Blue Chip Economic Indicators. The administration is also betting that inflation will be lower than many private forecasters expect, which improves the picture for “real” or inflation-adjusted economic growth.

But Romer defended the administration estimates. On average, she said, the rebound after other recessions since World War II has been slightly faster than the White House is predicting for this recovery. And because administration officials are expecting the job market to recover more slowly than usual, they are expecting inflation pressures to remain lower than normal as well. If inflation turns out to be higher than expected, deficits could end up higher as well.

At the end of the day, the Obama plan for deficit reduction is premised far more on pleasure than on pain. Peter Orszag, the White House budget director, estimated that economic growth would reduce the deficit from about 10 percent of the gross domestic product in 2010 to about 5 percent of GDP in 2015.

By contrast, the president’s policy changes – repealing the Bush tax cuts for wealthy families; freezing spending on many programs -- would reduce deficits an additional 1 percent of GDP. In dollar terms, that would translate to deficit reduction in 2015 of about $150 billion.

Critics of Obama’s budget said the biggest problem isn’t that the White House economic assumptions are too rosy. Rather, they said, the problem is that it doesn’t call for enough policy changes, to either spending or taxes, to get the budget back to sustainable levels by the end of this decade. Many of the toughest questions – about what to do about rapid rises in Medicare and Medicaid spending and possible changes in the tax code – will be left to a bipartisan commission that Obama intends to appoint this year.

"There is still a cognitive dissonance this year, just as there has been in previous years," said Leonard E. Burman, a professor of tax and budget policy at Syracuse University. “The problem is that this allows them to pretend that extending the Bush tax cuts is fiscally responsible, when it’s not, because we really can’t afford any of the tax cuts.”

The administration’s so-called “baseline" budget assumes that all the Bush tax cuts will be extended for all families earning less than $250,000 a year, that Alternative Minimum Tax revenues will be permanently reduced and that the cost of big-ticket tax breaks for individuals and businesses will rise faster than the rate of inflation. Taken together, Mr. Burman said, those policies would certainly add trillions to the deficit.

Even if the economy grows robustly, as White House officials predict, the deficit in 2015 would still be 3.9 percent of GDP – high by historical standards – and it would start climbing again as the retirement of baby-boomers begin to drive up spending on Medicare and Social Security.