On the surface, the latest economic forecast from the Congressional Budget Office is “good” news, in that it projects a ten-year budget deficit of only $3.5 trillion, which is about half of what was initially projected earlier this year. For 2011, the CBO estimates a deficit of only $1.3 trillion, marking the third straight year in which the United States has run a deficit in excess of $1 trillion, and the third-highest annual deficit in history, behind 2009 and 2010, but it’s still about $100 billion less than the previous forecast.
The CBO attributes the “improved” forecast to two major factors — the cuts mandated by the Budget Control Act passed by Congress earlier this month — which calls for a spending reduction of at least $2.1 trillion over the next decade — and a subsequent reduction in interest payments resulting from those cuts. However, even with these “savings” in place, CBO still projects the national debt to grow to $14.5 trillion by 2021. And in terms of overall economic outlook, CBO has significantly scaled back its predictions from earlier this year, forecasting GDP growth of 2.3 percent in 2011, compared to its earlier forecast of 3.1 percent.
In regard to unemployment, CBO predicts a slow but steady decline from the current rate of 9.1 percent, to about 8.5 percent in the fourth quarter of 2012, when voters will head to the polls to determine if President Obama deserves another four years in the White House. Remember being told that passing the $1 trillion stimulus package was necessary to keep unemployment below 8 percent? Well, CBO doesn’t see that happening until after 2014.
As grim as these forecasts may seem, they are actually quite rosy compared to those of most Wall Street firms. JPMorgan, for example, is predicting GDP growth of just 1.5 percent this year, and 1.3 percent in 2012 (compared to 2.7 percent by CBO), and an unemployment rate of 9.5 percent heading into election day.
Part of the reason why the CBO report appears so “optimistic” is that its predictions are based on an economic forecast dating back to early July, and therefore do not take into account the most recent spate of economic warning signs:
CBO initially completed its economic forecast in early July, but it updated the forecast in early August to reflect the policy changes enacted in the Budget Control Act. However, the forecast described here does not reflect any other developments since early July, including the recent swings in financial markets, weakness in certain economic indicators, and the annual revision to the national income and product accounts. Incorporating that news would have led CBO to temper its near-term forecast for economic growth.
Furthermore, going back to those “positive” CBO deficit projections, it’s important to note that those forecasts are calculated using a current-law baseline, meaning that it assumes the expiration of all of the Bush tax cuts in 2013, and a steep reduction in Medicare payments to doctors, which Congress has perpetually avoided by passing so-called “doc fix” legislation. The CBO itself has acknowledged that neither scenario is likely to occur.
All told, the CBO report is bad news for an already struggling economy, and perhaps worse news for the flailing Obama presidency. Not surprisingly, Republicans were quick to pounce on the report. “A slight decrease in the projected deficit is nothing to celebrate, particularly when it is accompanied by the grim news that CBO expects the national unemployment rate to continue to exceed 8 percent well past next year,” House Speaker John Boehner (R., Ohio) said in a statement. “The president’s policies were supposed to keep that from happening. Instead they’ve added trillions to our debt at the expense of our children and helped put our nation’s credit rating in jeopardy. Where are the jobs?”