Budget deficits may be twice as bad as White House is predicting

August 25, 2009

More to come on this, but the WH is predicting that as a percentage of GDP, annual budget deficits will decrease to around 4 percent over the next decade from 11 percent in 2009. Or will they? The Congressional Budget Office has some doubts (via the Director Doug Elmendorf’s blog):

Those projections generally follow the rules, originally established in
law, that have traditionally governed baseline projections.  However,
some of the resulting assumptions may underestimate potential deficits.
Because they presume no changes in current tax laws, the projections
incorporate increases in revenues that would result from the expiration
of tax reductions enacted earlier in this decade and provisions that
have kept the alternative minimum tax (AMT) from affecting many more
taxpayers.  They also assume that future annual appropriations grow
each year at the rate of inflation.  Those assumptions result in
projected revenues that, as a percentage of GDP, would be high by
historical standards, and projected discretionary spending that,
relative to GDP, would be low by historical standards. Many other
outcomes are possible.  If, for example, those tax reductions were
continued, the parameters of the AMT were indexed for inflation, and
future annual appropriations were to remain at their 2009 share of GDP,
the deficit in 2019 would reach 8.5 percent of GDP, by CBO’s estimates.

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