The 2012 Budget Surplus that Disappeared

by Jeff Rosen

As the nation’s federal budget problem comes back into the spotlight, it has unfortunately been forgotten that as recently as 2008, the White House Office of Management and Budget and the Congressional Budget Office both issued spending forecasts that determined that the federal government would have a budget surplus in 2012 and continuing thereafter. Although OMB and CBO used quite different policy assumptions, both foresaw surpluses starting in 2012 — CBO projected a surplus of $87 billion for 2012; OMB projected a surplus of $48 billion for 2012.

Instead, while a recession and some temporary tax relief reduced the government’s revenues, federal spending soared, the surplus disappeared, and the federal debt increased by trillions of dollars.

During the Obama administration, instead of moving towards the projected surpluses, the federal deficit exploded to a record $1.4 trillion in 2009, $1.3 trillion in 2010, and $1.3 trillion in 2011 — a level nearly triple the highest deficit ever recorded previously. The key role of the Obama administration’s ongoing spending increases demands more attention, even though the economic assumptions of the 2008 forecasts proved mistaken and tax revenues declined. Tax revenues will increase when economic growth is restored — indeed, CBO currently projects that revenues for 2012 will rebound to 2008 levels even with no change to the Bush tax rates. But the level of spending that has generated record deficits can only be fixed by a president and Congress. So, in light of both the OMB and CBO 2008 forecasts of a surplus in 2012, it is reasonable to ask how close spending is to the 2008 path to a balanced budget.

In 2008, with the economy in recession, federal spending was just under $3 trillion. The Obama administration and the 2009–2010 Congress chose to enact extraordinary spending increases, starting with the 2009 “stimulus” bill, but then extending to various appropriations bills and new entitlement spending (such as health care spending). As a result, federal spending in 2011 alone was increased to $3.6 trillion — nearly $400 billion more than the Bush administration had contemplated, and more than $600 billion above the 2008 level.

A look at the budget proposal the Obama administration submitted to Congress this year shows the significantly higher level of spending each and every year relative to the spending previously projected in the 2008 CBO forecast:

The CBO director at the time of its 2008 forecast was Peter Orzag, who one year later became President Obama’s budget director. Nonetheless, the Obama administration sought to spend at least $4 trillion more over the next decade than the path of earlier spending policies that its own budget director had forecast previously in 2008. That is hundreds of billions of extra new spending every year. It will continue to generate untenable deficits. CBO recently forecast that if current spending and tax policies continue unchanged, then annual deficits will exceed $1 trillion every year for the rest of this decade. These unprecedented spending levels and deficits have predictably generated major concerns about the fiscal situation of the United States, to the detriment of our economy.

Not only will Americans miss out on the surpluses that CBO and OMB both had forecast for 2012 and thereafter, but the spending increases adopted by President Obama and the Congress of 2009-2010 have left our nation in a perilous place — with a worsening debt burden more like Europe’s than like the 2008 forecast. Equally importantly, those elevated spending levels present a straitjacket for our economy that must be escaped.

What is to be done? Relative to the president’s budget proposal, approximately $4 trillion of spending could be avoided by returning to the spending path that CBO set out in 2008, and even more with the OMB planned spending levels from 2008. The president’s own National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, recommended that discretionary spending levels go back to the 2008 level. That was a sensible recommendation to begin to reduce federal spending. It is unfortunate that to date the president has not been willing to support it, even though it came from his own commission. The president’s insistence on continued spending increases, even if slowed from his original plan, will not solve the deficit problem nor fix our economy.

— Jeff Rosen served as general counsel and senior policy advisor at the White House Office of Management and Budget during 2006–2009, and is now a lawyer in Washington, D.C.

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