How Far Off Is The Revenue Projection In The Budget?

A fine way to hold onto your job and move up in the world is to hold true the maxim of “under promise, over deliver.”  When President Obama runs for reelection, we may find that he has committed one of the most egregious violations of this approach to expectations control.  On Thursday, the Obama administrated released its proposed 2010 Federal Budget.  The plan for reducing the deficit by more than half by 2013, or to $533 billion was described in this proposal.Much of this budget shifts funds  from one part of the government to another in an effort to make progress on some of the promises that President Obama made in his campaign.  These changes include the elimination of most of the spending on the Iraq War by the end of 2010 and expanding government spending on healthcare.  Overall, government spending will increase to more than $3 trillion through 2013.

Additionally, the proposal incorporates President Obama’s proposal to the tax code.  This includes raising taxes on the rich (individuals making over $200,000 and families making more than $250,000), lowering taxes for the lower and middle classes, and eliminating loopholes and exemptions.  Overall, the reformed tax policy should equate to less tax revenue at any given level of GDP.  What assumption is driving the Obama administration’s claim that it will be reducing the budge deficit?

President Obama can exercise considerable control over government expenditures, however his argument for reducing the budget deficit hinges on a variable that is largely out of his control.  Inherent in all projections in the budge proposal is an assumption that the economy will grow at an annualized rate of a little over 5% between 2010 and 2013.  Receipts from income taxes and corporate taxes, the two largest sources of government revenue, are projected to grow by roughly 42 percent and 86 percent over the same time period.  Projecting economic growth is always tricky business.  However, given the current state of the global economy and the fact that GDP growth has been close to 3% over the past 50 years of U.S. history, the 5% figure seems a bit unrealistic.

A deviation from this projected growth trajectory will cause President Obama to miss his 2013 deficit target.  Should income tax revenue grow at 30% and corporate tax revenue 60%, holding spending constant, the 2013 deficit will come in at a little over $800 billion.  While this estimate may be possible four years from now, the point is that that the Obama administration has picked the upper limit for a GDP growth estimate in making its projections.

There are two possible economic and political implications if President Obama misses his budget target for 2013.  In the current economic climate international investors are more than willing to finance the U.S. government’s deficits because it is the safest place for their money.  If this trend continues the Obama administration can stick to its spending plans at the expense of expanding the national debt.  If, however, the world becomes more concerned about the United States’ growing debt burden, financing for $3.3 trillion worth of spending projected for this year may be more difficult to find.  In the political realm, it is possible that a significant mistake in economic calculations might cost President Obama his job.  However, given the American public’s concern for fiscal responsibility he may get a mulligan.

Garrett McIntyre