Obama Budget Based on Optimistic, But Not Fanciful, Assumptions

Rosy Scenario has been a long-running character in the country's annual budget drama.

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Since she was first invoked to describe the first Reagan budget, Rosy Scenario has been a long-running character in the country's annual budget drama. Over the years, presidents have often been accused of adopting overly optimistic economic assumptions to paint their budgets in the best light possible, and President Obama is no exception.

[Read David Shulman: Barack Obama's Budget to Nowhere]

But the way I see it, compared with some of the forecast crimes committed in the 1980s, the optimistic assumptions in the Obama economic forecast are at worst only misdemeanors. 

It would be naive to think that an administration's economic forecast is developed in a political vacuum, but for some time now the documents submitted along with the president's budget include a discussion of the economic assumptions that includes comparisons with those of the Congressional Budget Office (CBO) and the Blue Chip consensus of private forecasters. Obvious discrepancies are there for all to see and are usually accompanied by an explanation for the differences.

In principle, comparing these economic forecasts is comparing apples to oranges to peaches. The administration's forecast is predicated on enactment of the proposed policies in the budget; CBO's forecast is predicated on the continuation of current law; and each individual private forecast in the Blue Chip makes its own assumptions about what fiscal policy will be over their forecast period.  In practice, however, the CBO, president's budget, and Blue Chip forecasts have been fairly similar in recent years. Nevertheless, relatively small differences in economic assumptions can make a difference of hundreds of billions of dollars in cumulative tax receipts, and hence the deficit in a 10-year budget projection, and create the impression that the forecasts differ significantly.

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This year, as the chart below shows, the 2013 budget forecast looks more optimistic than CBO's baseline forecast in two respects:

  • CBO's near term forecast shows a slowing of the economy in 2012 and 2013, whereas the administration's shows the expansion continuing. That's because CBO's baseline assumes all the tax cuts scheduled to expire at the end of 2012 do so, which would temporarily slow economic growth, while the 2013 Budget forecast assumes the short run stimulus policies in the president's budget are enacted. CBO also discusses an alternative budget scenario, with more short-term stimulus, in which the economy grows faster in 2012 and 2013 than it does in the CBO baseline.
  • The administration is more optimistic about how much "headroom" the economy has to grow before reaching full employment and settling down to its long-run sustainable growth rate, and it uses slightly more optimistic assumptions about how fast the labor force will grow at full employment. The result is an economy that is about 3 percent larger in the 2013 budget forecast than it is in the CBO baseline forecast.
  • It's impossible to know with certainty how fast the economy can grow in the long-run, and both the CBO and the 2013 budget forecasts are within the range of plausible projections. Indeed, the two forecasts both assume a roughly similar path for the unemployment rate and the long-run sustainable growth rate. Both forecasts show the unemployment rate reaching 5.5 percent in 2018 and drifting down a little bit thereafter.  CBO assumes the long-run sustainable growth rate is 2.4 percent compared with 2.5 percent for the administration.

    When CBO issues its analysis of the president's budget in about a month, it will use its own economic assumptions. That could produce somewhat higher budget deficits as a share of GDP than in the president's budget, but compared with the deficit levels of the last few years that will still be a significant improvement.

    • Read about two big problems with Obama's budget.
    • Read about why Obama's budget doesn't matter.
    • Read about Obama's budget to nowhere.