Zero Hedge 
March 19, 2011
Today the Congressional Budget Office slammed the president’s unrealistic budget presented recently, concluding that the cumulative deficit over the decade between 2011-2021 would be $9.5 trillion, or $2.3 trillion higher than that estimated by the White House. The reason for the differences according to the CBO is  “differences in the underlying projections of what would happen under current law ($1.3 trillion) as well as from differing assessments of the effects of the President’s proposals ($1.0 trillion).” Then again, as we fail to recall when was the last time even the slightly more realistic CBO predicted a correct cumulative deficit ten years forward, we are fairly certain both will vastly underestimate the actual deficit by 2021. And as gross debt issuance tends to run about 50% over cumulative deficits , Zero Hedge expects that the best case scenario is for $15 trillion in debt issuance over the next 10 years as a baseline, and likely far more (bringing total marketable debt to around $25 trillion by 2021). This is problematic to say the least, because as the AP notes , the White House’s goal is to reach a point where the budget is balanced except for interest payments on the $14 trillion national debt. Such “primary balance” occurs when the deficit is about 3 percent of the size of the economy, and economists say deficits of that magnitude are generally sustainable. Instead, just the interest expense per the CBO will be greater than this threshold: “Outlays would be greater under the President’s budget than in CBO’s baseline in each of the next 10 years, largely because the proposed reduction in revenues would boost deficits and thus the costs of paying interest on the additional debt that would accumulate. In particular, net interest payments would nearly quadruple in nominal dollars (without an adjustment for inflation) over the 2012–2021 period and would increase from 1.7 percent of GDP to 3.9 percent.” And once again, this is based on numbers which will likely way undershoot the final outcome.
The key summary points of the CBO’s revised budget :
- Under the President’s proposals, the federal budget deficit would total $1.2 trillion in 2012 and smaller amounts in later years, averaging 4.8 percent of gross domestic product (GDP) over the 2012–2021 period.
- Deficits would total $9.5 trillion between 2012 and 2021 under the President’s budget, $2.7 trillion more than the amounts projected in CBO’s March baseline. Debt held by the public would rise from 69 percent of GDP in 2011 to 87 percent of GDP in 2021.
- The President’s policy proposals, on net, mostly affect the revenue side of the budget: Relative to CBO’s baseline, revenues would be lower in every year of the coming decade—for a total reduction of about 6 percent over the 2012–2021 period. Most of the revenue changes would result from extending tax policies that are currently in effect or were in effect in the recent past.
- Outlays (other than net spending for interest costs) would be slightly lower under the President’s budget than in CBO’s baseline over the next 10 years.
The details provided by the CBO (which are highly irrelevant: nobody in their right mind can predict what will happen next week let alone in 10 years, but that’s what taxpayer money is spent on these days):
CBO’s Updated Baseline Projections. As a basis for analyzing the President’s budget, CBO updated its baseline budget projections, which were last issued in January 2011. Unlike its estimates of the President’s budget, CBO’s baseline projections largely reflect the assumption that current tax and spending laws will remain unchanged. Under that assumption, CBO estimates that the deficit will total $1.40 trillion in 2011—$81 billion less than the agency estimated in January. For the 2012–2021 period, CBO now projects a cumulative deficit of $6.7 trillion—$234 billion less than the amount in the previous baseline. CBO has not modified its economic forecast since January, so the updated baseline projections largely reflect new information that the agency has obtained about various aspects of the federal budget.
CBO’s Analysis of the President’s Proposals. CBO analyzes the President’s budget using its own economic assumptions and estimating techniques (rather than the Administration’s) and incorporates estimates prepared by the staff of the Joint Committee on Taxation (JCT) for tax provisions. According to CBO’s projections, if all of the President’s budgetary proposals were enacted, they would add $26 billion to the baseline deficit for 2011. The 2011 deficit would total $1.43 trillion, or 9.5 percent of gross domestic product.
- A d v e r t i s e m e n t
In 2012, the deficit under the President’s budget would decline to $1.2 trillion, or 7.4 percent of GDP, CBO estimates. That shortfall is $83 billion greater than the deficit that CBO projects for 2012 in its current baseline. Deficits in succeeding years under the President’s proposals would be smaller than the deficit in 2012, although they would still add significantly to federal debt. The deficit would shrink to 4.1 percent of GDP by 2015 but then widen in later years, reaching 4.9 percent of GDP in 2021. Federal debt held by the public would double under the President’s budget, growing from $10.4 trillion at the end of 2011 to $20.8 trillion at the end of 2021.
The President’s policy proposals, on net, would have the largest effect on the revenue side of the budget. Those proposals would reduce revenues, relative to CBO’s baseline projections, in every year of the coming decade. Nevertheless, revenues would rise relative to GDP: from 16.2 percent in 2012 to 19.3 percent in 2021. That figure is below CBO’s baseline projection for 2021 (20.8 percent) but higher than the average ratio of revenues to GDP seen over the past 40 years (18.0 percent).
Most of the revenue changes would result from extending tax policies that are currently in effect or were in effect in the recent past. The tax package enacted late last year extended through December 2012 many of the tax reductions originally enacted in 2001 and 2003. The President proposes to extend those reductions permanently, with some modifications, and to permanently index for inflation the amounts of income exempt from the alternative minimum tax, starting at their 2011 levels. In addition, the President proposes that, beginning in January 2013, estate and gift taxes return permanently to the rates and exemption levels that were in effect in calendar year 2009. Those policies would reduce tax revenues and boost outlays for refundable tax credits by a total of more than $3.0 trillion over the next 10 years relative to the amounts projected in CBO’s baseline.
Outlays would be greater under the President’s budget than in CBO’s baseline in each of the next 10 years, largely because the proposed reduction in revenues would boost deficits and thus the costs of paying interest on the additional debt that would accumulate. In particular, net interest payments would nearly quadruple in nominal dollars (without an adjustment for inflation) over the 2012–2021 period and would increase from 1.7 percent of GDP to 3.9 percent. Total outlays under the President’s budget would equal 23.6 percent of GDP in 2012, decline slightly as a share of GDP over the following two years, and then rise for the rest of the 10-year projection period. They would equal 24.2 percent of GDP in 2021—about 0.3 percentage points above CBO’s baseline projection for that year and well above the 40-year average for total outlays, 20.8 percent.
Spending proposals with the largest budgetary impact over 10 years include the following:
- Medicare: The President proposes to freeze Medicare’s payment rates for physicians at the current level throughout the 2012–2021 period. That policy would boost outlays by $0.3 trillion relative to the amount under current law (which calls for sharp reductions in payments to physicians).
- Transportation: Higher spending on surface transportation programs would add another $0.2 trillion to the total deficit between 2012 and 2021.
- Defense: The President’s budget includes a total of $0.9 trillion less in spending for defense over the 2012–2021 period than the amount projected in CBO’s baseline. The main reason for the difference is that the baseline incorporates the assumption that funding for war-related activities will continue at $159 billion a year (the amount provided so far for 2011, annualized) with adjustments for inflation, whereas the President’s budget includes a request for appropriations of $127 billion for such activities for 2012 and a placeholder of $50 billion a year thereafter.
The complete CBO analysis of the President’s Budget can be found here.