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Jan 27

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CBO Releases Alarming Deficit Forecast

In his Tuesday State of the Union address, President Obama said:

… understand if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery—all of which would have an even worse effect on our job growth and family incomes.”

The president is right.  For example, the IMF recently wrote a report that states the U.S. is broke.  Unfortunately, the President did not follow-up his concern over the deficit with sufficient concrete action. 

The day following the State of the Union address, the Congressional Budget Office (CBO) also agreed with President Obama’s statement that the budget deficit is way too big.  The CBO is not really much of a budget hawk, as evidenced by the terrible job they did with their budget work on last year’s health care act.   Putting aside the CBO’s lack of credibility to make tough budget calls, the CBO estimates:

  1. The federal budget deficit will hit a record $1.5 trillion this year.
  2. The current-year federal deficit is on track to beat the record of $1.4 trillion set in 2009.
  3. This will be the third year in a row of deficits that exceed a trillion dollars.
  4. The federal government will borrow 40 cents for every dollar it spends in 2011.
  5. The deficits are not caused by failing tax revenues, which are estimated to rebound to pre-recession levels of 18% of GDP.  Instead, the deficits are caused by significant spending increases.

Importantly, all of the above deficit amounts are significantly understated because the CBO makes unrealistic assumptions regarding the expiration of tax provisions that are likely to be renewed.  Additionally, the forecast does not represent a worst case estimate, as the CBO assumes unemployment will decrease and the economy will grow by over 3%.

One thing that President Obama should have done, but did not, was advocate acceptance of the recommendations of his own budget commission.

About the author

Nicole Liska

I am a Principal at Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I hold an ABD and MA in economics from the University of California, San Diego. I perform damages analyses and serve as a damages expert witness. My resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2011/01/cbo-releases-alarming-deficit-forecast/

1 comment

  1. Rope

    Your anwesr was just what I needed. It’s made my day!

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