Latest White House Budget, Like All Before It, Rests on Overly Optimistic Assumptions

The budget for fiscal year 2015 (October 2014 through September 2015), just published by the White House, presents an optimistic prognosis for US fiscal health. Like all budgets, it looks ahead not just one, but several years. It projects that the budget deficit, expected to be 4.1 percent of GDP in 2013, will fall to 3.1 percent in 2015 and to 1.6 percent in 2024. According to its forecasts, the ratio of debt to GDP will peak in 2016 at 74.6 percent and then decline to 69 percent by 2014.

Some of these results are supposed to result from changes in tax and spending policies, but most of them come from assumed improvements in the economy. Real GDP, which grew 2 percent year-on-year in FY 2013, is projected to rise to 3.1 percent in FY 2015. After that, the Office of Management and Budget (OMB) expects growth to slow a bit, but still to average more than 2.5 percent over the next ten years. This budget, like all budgets before it, assumes that there will be no recessions over its 10-year time horizon.

However, if the projected steady growth of the economy does not materialize, neither will the deficit reductions. Unfortunately, budget history suggests that the OMB has a chronic tendency to look at the world through rose-colored glasses. When I first wrote on this topic three years ago, I illustrated the over-optimism of the OMB under George W. Bush with comparisons of assumptions on which past budgets were based with the actual performance of the economy. At that time, it was too soon to know whether projections by Obama’s OMB would be equally unrealistic. It is now evident that they have been. >>>Read more