Accounting deficits: how bad is the budget meltdown?

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February 2004

Account deficits: how bad is the budget meltdown?
Foreign aid increases passed by Congress

Accounting deficits:
How bad is the budget meltdown?
On January 26, the Congressional Budget Office issued new budget projections that show the federal government running a large cumulative deficit over the next ten years. As CBO acknowledges, however, its baseline projection is unrealistically optimistic, since it does not include the costs of continuing various policies, such as the recent tax cuts. The true levels of annual deficits and total debt bloat by 2014 could be substantially worse than the jaw-dropping figures the budget office is already using, according to the Center on Budget and Policy Priorities.

Omitted costs that are likely or virtually certain to be incurred exceed $3.3 trillion. Adjusting the CBO baseline for such costs, raises the deficit projection to $5.2 trillion over the next ten years. Other analysts, such as economists at the Brookings Institution and Goldman Sachs, have also projected that deficits will exceed $5 trillion over the decade.

The new CBO ten-year projections understate the likely size of future deficits because they do not reflect the costs of continuing various policies currently in effect; for example, the CBO baseline assumes that all of the tax cuts enacted since 2001 will expire. The baseline also assumes that relief from the Alternative Minimum Tax (AMT) will end, and the number of tax filers subject to the AMT will rise from three million today to 29 million by 2010.

The new CBO report projects deficits totaling $1.9 trillion over the ten-year period from 2005 through 2014. A more realistic assessment—one that uses CBO estimates but incorporates likely or inevitable costs, following the same methodology that was used in the September 2003 report by the Committee on Economic Development, Concord Coalition, and the Center on Budget and Policy Priorities—shows a ten-year deficit of $5.2 trillion.

Under these assumptions, the national debt climbs from $4.0 trillion today to $9.7 trillion by the end of 2014 (reflecting the $5.2 trillion in deficits for the 2005 – 2014 period, plus the nearly $500 billion deficit in 2004). Debt rises from 33 percent of Gross Domestic Product in 2001 to 54 percent of GDP by 2014.

Under the more realistic assessment, the deficit exceeds $400 billion in every year and stands at about $477 billion in 2009, the year in which the President has said that the deficit would be cut in half. The $477 billion figure is essentially identical to the projected 2004 deficit, indicating little progress toward the Administration’s goal of halving the deficit. Furthermore, by 2014, under these more realistic assumptions, the deficit reaches $708 billion.

The data show that the large deficits projected for the coming decade are more a reflection of a historically low level of revenues, measured as a share of the economy, than of an unusually high level of federal spending. In 2004, revenues will total only 15.8 percent of GDP under current law, the lowest level since 1950. Although revenues will rise as the economy recovers from the recession, they still will average only 17.1 percent of GDP over the coming decade (2005 through 2014), assuming the recent tax cuts are extended and AMT relief is continued. That is below the average levels for every decade in the second half of the 20th century.

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