Long-range budget projections are always packed with uncertainty. Changes in the underlying economic assumptions, eventual economic realities and shifts in policy making give such estimates limited value.
Some value can be found, however, in terms of determining the general direction current budget policies are pointed and where they could take federal spending, revenues, deficits and debt and, therefore, the effects on individuals, businesses and the economy.
The Congressional Budget Office (CBO) recently offered its preliminary analysis of President Barack Obama’s proposed budget for the 2012 fiscal year. This CBO analysis offers a powerful reminder of how hazardous the president’s spending and taxing agenda is for the economy.
Consider the key areas of overall spending, federal revenues and deficits and debt.
On the spending front, the CBO projects that federal spending under the Obama budget proposal would climb relentlessly higher year after year. And this comes on top of a
40 percent increases in federal outlays from FY 2007 to FY 2011.
Federal spending would jump from $3.46 trillion in FY 2010 to an estimated $4.19 trillion in FY2 015 — an increase of 21 percent. Outlays would continue skyward, hitting $5.76 trillion in FY 2021.
How does this compare relative to the economy and recent history? The CBO states: “Total outlays under the president’s budget would equal 23.6 percent of GDP in 2012, decline slightly as a share of GDP over the following two years and then rise for the rest of the 10-year projection period. They would equal 24.2 percent of GDP in 2021 … well above the 40-year average for total outlays, 20.8 percent.”
This historic level of government spending would serve as a huge drag on economic growth by both diverting resources from the private sector into government and threatening even higher taxes.
On the revenue side of the federal budget equation, the CBO reports: “As a share of GDP, revenues would average 18.7 percent over the next 10 years under the president’s budget, compared with 19.9 percent in CBO’s baseline projections.” Either level would hurt the economy.
Keep in mind that by FY 2014, the CBO projects that federal revenues as a share of GDP will hit 18.6 percent, register 19 percent in FY 2016 and climb to 19.3 percent by FY 2021.
Again, this raises serious questions about U.S. growth, as history shows that whenever revenues rise close to or above the 18.5 percent to 19 percent range, the economy suffers.
Finally, as for federal deficits and debt, the ills only accumulate. The CBO projects the deficits between FY 2012 and FY 2021 would tally up to $9.5 trillion and federal debt held by the public would increase from $10.4 trillion at the end of
FY 2011 — 69 percent of GDP — to $20.8 trillion at the end of FY2021, 87 percent of GDP.
During this period, the annual deficit is projected to move from $1.43 trillion in FY 2011 down to $748 billion in FY 2015, and subsequently rise to $1.16 trillion in FY 2021.
It should be obvious to all that the U.S. federal government needs to be redirected down a very different budget path. Substantive tax relief is needed to help get the economy back on a robust path of economic growth and major spending reductions are required to get the budget back under control. Short of this, the U.S. is staring at a very bleak budget and economic future. Yet, the president seems to ignore where the budget is headed, and we have to see if this new Congress fully gets it or not.
Raymond Keating is chief economist for the Small Business & Entrepreneurship Council. Reach him through the Web site located at www.sbecouncil.org.