Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Concord Takes a Whack at the 10-Year Forecast

Creating 10-year forecasts for the U.S. budget is unavoidably an arbitrary process. The final output in terms of deficits and accumulated debt depend upon the assumptions built into the budget models. The Office of Management and Budget (OMB) makes the baseline assumptions. The Congressional Budget Office (CBO) refines some of those assumptions, usually by fine-tuning spending projections, but accepts other assumptions, such as the rate of economic growth and prevailing interest rates. Accordingly, CBO’s projections differ from the administration’s only by degree.

Then there are not-for-profit advocacy groups like the Concord Coalition, which have the leeway to make different policy assumptions, mainly on the tax and spending side. The differences can be startling. In a recent exercise, Concord looked at the budget projections for the decade of 2011 to 2020. Where the CBO had projected accumulated deficits of $6.2 trillion, Concord came up with a cumulative deficit of $15.2 trillion.

Who’s projection do you believe? It all depends upon whose assumptions you find more plausible. CBO is required to assume that current law will continue to govern over the next decade, thus the Bush-era tax cuts will expire on schedule next year and tax collections will surge. CBO also is forced to assume that Congressional appropriations increase no faster than the rate of inflation (har! har!) By contrast, Concord expects (1) spending to increase at the same rate as the nominal GDP (inflation + economic growth), (2) that the Obama administration slowly draws down the troops in foreign wars, and (3) that Medicare physician cuts are postponed indefinitely. Concord also assumes that the Bush-era tax cuts are extended, and that Congress continues applying patches to the Alternative Minimum Tax. Here is the result:

At the moment, Concord’s assumptions appear to be more realistic. But, who knows what will happen a few years from now? If the Republicans make the electoral gains this fall that many political pundits are projecting, and if Obama loses in 2012, budget forecasters will have to take into account a very different tax and spending environment.

While Concord’s assumptions may be more realistic than CBO’s, Concord has voluntarily placed itself in a strait jacket of its own. Concord appears to accept the economic assumptions as provided by OMB and CBO. However, as I demonstrated in “Boomergeddon,” economic assumptions are just as critical for a 10-year forecast as are the tax and spending assumptions. If you assume a weaker economy recovery and a modest recession by 2017, annual deficits could run $700 billion a year higher than the OMB forecasts. Assume 10% interest rates on 10-year Treasuries by 2020, and annual deficits could run $1 trillion a year higher.

If we make the same tax and spending assumptions as Concord, layer in a slower growth rate (as seems to be occurring), rising interest rates in the second half of the decade (as some analysts are projecting) plus a recession (we’re going to have another one eventually), all bets are off. Deficits and the national debt will run so high that confidence in the system will collapse well before 2020. I’m betting that we muddle through the 2020s by making policy changes, which neither CBO nor Concord currently foresee, in a weak stab at fiscal discipline. But as Boomers continue retiring en mass, putting more pressure on Medicaid and Medicare especially, and as interest rates climb in the next decade, there will be no muddling through the 2020s. Sooner or later, the federal government will go into default. It’s only a question of when.

Disclosure: No positions