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When George W. Bush was sworn in as the 43rd President of the United States the Congressional Budget Office (CBO) estimated that the federal budget for fiscal year 2002 would be in surplus by an eye-popping $405 billion. Last week, the CBO issued its latest estimate for 2002: a $157 billion deficit. In just over 19 months in office, President Bush has overseen a $552 billion swing in the 2002 budget and an estimated $7 trillion deterioration of the federal government’s 10-year fiscal outlook.
Such a reversal of fortune is staggering and could be a political liability for the president’s party in this November’s midterm elections. Democrats have been quick to blame the Bush tax cut for the deficits, but according to the CBO figures, only $74 billion, or 13.5 percent of the accounting change is attributable to the tax cut. Increases in discretionary spending (14.1 percent) – some of it to finance military reprisals to the September 11th attacks – and the economic downturn (17.8 percent) both dwarfed the fiscal effect of the tax cut, as Republicans will be sure to point out on the campaign trail.
But, as math majors have already discovered, the aforementioned economic and legislative developments account for less than 50 percent of the change in the overall budget. The biggest factor in the dramatic reassessment has been what the CBO calls “technical changes,” completely unrelated to any federal policy. The CBO describes these changes as adjustments to economic and tax policy assumptions, which is a nice way of saying that their estimates were just plain wrong.
This should not be surprising. Budget estimates are exceedingly difficult to make, even for the next year. In addition to unreliable forecasts of economic activity, federal budget estimates must rely on speculation about how much tax revenue such activity can be expected to yield. Stock market observers often joke about how the average analysts’ stock picks are no better than if a monkey were to throw darts at the newspaper’s financial pages. To get a sense of the reliability of CBO estimates, spin the monkey three times beforehand.
As John Barry of the Tax Foundation points out in a recent memo, the CBO’s March 1997 prediction for the 2002 deficit was much more accurate ($188 billion) than the estimate made just last year. Barry argues, sensibly, that “federal deficit estimates are no basis for tax policy,” as “margins of error of 50 percent or greater are typical.” Voters should be wary when politicians treat speculative forecasts of volatile budgets as gospel.
Instead, policymakers should use more reliable estimates and hard numbers whenever possible. For instance, when determining the appropriate level of taxation and spending, instead of looking to unreliable budget estimates lawmakers should consider the relationship between federal tax receipts and spending to Gross Domestic Product (GDP). President Bush’s tax cut was not good policy because CBO calculations estimated a $5.4 trillion surplus over ten years, it was good policy because federal tax receipts had grown to 20.3 percent of GDP, a peacetime record. It was this dramatic growth in taxes relative to the economy – not sound fiscal management as some would have us believe – that led to the budget surpluses of recent years.
While it is true that a $290 billion deficit in 1992 was turned into a $236 billion budget surplus in 2000, federal spending grew by over 35 percent during that time and was only held that low because the 1995-96 conservative Republican majority was willing to shut down the government to keep growth below 2 percent for a single fiscal year.
Budget estimates will never be abandoned because they can serve a useful purpose. The U.S. Treasury needs to have a sense of how much bonded debt it needs to issue to cover federal spending and can use deficit projections when deciding what type of debt to issue and how much to make available for auction. But in the hands of opportunistic politicians, budget projections can be a dangerous, albeit misleading, rhetorical weapon.
The CBO does as good a job forecasting deficits and surpluses as any private or public economic research group in the country, but it would be nice if politicians included the same disclaimers as CBO when using its numbers. Of course, this will not happen until politicians eschew distortion as a political weapon, an outcome about as likely as this year’s CBO forecast for the 2012 budget deficit.