Today’s report makes it challenging to avoid playing the dismal economist, which I generally dislike doing.
The budget deficit has risen substantially over the past year. And according to CBO’s updated economic forecast, the economy is likely to experience at least several more months of weakness. (Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession.)
Finally, the Treasury and Federal Housing Finance Agency have announced significant steps regarding Fannie Mae (FNM) and Freddie Mac (FRE), which carry important implications for how the operations of those entities should be reflected in the federal budget. The estimates presented in the report CBO released today do not reflect the specific details of those actions…
My first reactions are also a bit of dismay and disappointment in not so much the $407 billion deficit for 2008 (which was expected) but the fact that now even under the official CBO (current-law) baseline, the budget never comes into balance. (In their projections earlier this year (last updated in March), CBO estimated surpluses in each year over the 2012-18 period under the current-law baseline.)
In other words, sticking to the pay-as-you-go rules in our future decisions about extending the tax cuts or enacting new entitlement spending is no longer a way to get to a balanced budget in four or five years. Also, this implies that Senator McCain, in promising to achieve a balanced budget in 2013 under his administration, is promising to be even more fiscally disciplined than “just” sticking with pay-go or current-law budget discipline, which seems an even taller order given that he’s already waived pay-go “in spades” on the tax side.
If you look at what caused the baseline to deteriorate so much since January (see Table A-1 on pages 54-55), you’ll see that it’s a combination of: (i) lower revenues due to worsening economics, (ii) higher discretionary outlays (particularly in defense spending) due to legislation, (iii) higher Social Security and other COLA-related (cost-of-living adjusted) programs due to worsening economics, and (iv) higher interest outlays due to worsening economics.
That’s a lot of budget things that turned south because the economy turned south. It seems to me that this is why we have to worry about fiscal policy paths that not only have bad “static” budgetary implications but also jeopardize economic growth.