The Congressional Budget Office (CBO) is supposed to be nonpartisan, but the updated 2012 budget projection is just alarming, and its projections under the coming fiscal cliff need to be paid attention to after the poor baseline scenario. This new report will give the Republicans more ammunition of fiscal irresponsibility, but it also will give the Democrats ammunition that things were not as bad as expected. As a reminder, the U.S. government’s fiscal year ends on September 30 each year, rather than the December 31 date for most corporations.

The CBO now projects that the federal budget deficit will total $1.1 trillion for 2012.  This is down from a preliminary figure of $1.2 trillion given back in March. That is the good news. The bad news is that this marks the fourth year in a row with a deficit of more than $1 trillion.

The deficit makes the United States stand out — the deficit is projected to be a whopping 7.3% of gross domestic product (GDP).  The CBO said in its own words, “This year’s deficit will be three-quarters as large as the deficit in 2009 when measured relative to the size of the economy.”

Today’s projection from the CBO also said that federal debt held by the public will reach 73% of GDP by the end of this fiscal year. In the CBO’s own words, this is “the highest level since 1950 and about twice the share that it measured at the end of 2007, before the financial crisis and recent recession.” You can be almost assured that this figure is going to be political ammunition.

Here are some additional points made by the CBO:

• CBO expects the economic recovery to continue at a modest pace for the remainder of calendar year 2012.
• Inflation-adjusted GDP growth at an annual rate of about 2.25% in the second half of the year versus about 1.75% in the first half.
• The unemployment rate will stay above 8% for the rest of the year and the rate of inflation in consumer prices will remain low.

It is important to realize that the CBO projections are made “under its routine procedures — baseline projections that incorporate the assumption that current laws generally remain in place” and that these are designed to serve as a benchmark that policymakers can use when considering possible changes to those laws.

The report’s introduction ends with

However, the outlook for the budget deficits, federal debt, and the economy are especially uncertain now because substantial changes to tax and spending policies are scheduled to take effect in January 2013. Therefore, CBO has also prepared projections under an alternative fiscal scenario, which embodies the assumption that many policies that have recently been in effect will be continued.

The current case and the alternative need to be read closely because the CBO is calling for a recession with -0.5% GDP and unemployment rising to about 9.0% in 2013 if the situation is just allowed to unravel. It notes:

Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.

The full report and 2013 projections with the coming fiscal cliff can be found here.

JON C. OGG

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