Financial Confusion Reigns On Record $1.6 Trillion Deficit Forecast

The White House is about to present its budget to Congress for the 2010 fiscal that will cause a $1.6 trillion deficit and $3.8 trillion in spending. That would be an all-time record and $200 billion higher than the 2009 number.  The Administration’s budget would add $8.5 trillion to the federal debt through 2020 growing the debt as a percentage of GDP to 77%, The White House forecasts that the deficit would drop to $727 billion, or 4.2% of the gross domestic product, by 2013.

Obama’s proposal will include a freeze on spending increases in some discretionary government programs, but the $250 billion savings that represents over ten years will have the most minor affect on the red ink.

The President and some members of Congress would like to put together a bipartisan panel to analyze the nation’s finances and suggest budget cuts, but members of the legislative branch may find the cuts unpalatable as they seek re-election.

One of the most difficult problems is solving the budget crisis is agreeing on what the deficits will be. The differences between the Congressional Budget Office forecasts and those from The White House budget authority are substantially different, which means it will be difficult to moderate spending because there is so little agreement on what expenses and revenue will be.

For the 2010 fiscal year, the Administration forecasts a $1.6 trillion deficit. The CBO forecast is $1.35 trillion. The 2011 forecast from the Administration is for a shortfall of $1.3 trillion. The CBO figure is $980 billion. The spread between the two predictions grows even further apart by 2020 when the difference is between a White House estimate of a $1.6 trillion shortfall and a CBO figure of $687 billion.

These tremendous difference will cause more disputes over how the problem should be attacked and solved. The most important assumption is the figure for receipts to the IRS. It may be possible to manage costs to some extent. Managing revenue is nearly impossible. It relies on economic growth, unemployment, and tax rate. There has been a school of thought for many years that raising tax rates slows economic activity so the net collections by the IRS actually fall.

The other difference in projections is one of degree but not one of severity. The costs of Social Security, Medicare, and Medicaid rise faster than almost any other sets of costs. As the population, especially the so call Baby Boomers, age, the needs for social services for the old and infirmed increase at an impressive rate.

The need to bring down the deficits is clear. The size and scope of those deficits seem nearly impossible to measure, which makes the cutting all the more difficult.

Douglas A. McIntyre