Obama’s 2015 Budget Follows Long Tradition of Excessive Optimism
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.
The following chart shows that from 2003 through 2013, White House proposals assumed economic growth in the budget year itself (labeled Year B in the chart) would be an average of 1.6 percentage points higher than it actually turned out to be. The bias in the projection for the year following the budget year (e.g., the projection for 2010 made in the budget message for 2009), shown as Year B+1 in the chart, the upward bias was 1.7 percentage points, and for the second year after the one being budgeted, B+2, the bias was 1.8 points. Not surprising, the biggest deviations were for the recession year FY 2009.
No one could expect the OMB’s budget forecasts to be accurate every year. Economic forecasting is an inexact art. What we could hope for, though, would be unbiased forecasts that would miss on one side as often as the other, unlike those of the OMB. Chronically optimistic budget forecasts make it more difficult to plan the kind of sustainable, countercyclical fiscal policy that the country needs, but has not had. When the Obama administration took office, it promised all kinds of change. Now we can see that budgeting is just one more area in which it has failed to deliver.
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