by Calculated Risk on 9/09/2008 12:13:00 PM

From MarketWatch: Federal budget deficit to remain near $400 billion, CBO says

With the economy weakening and spending on the war rising, the federal government's budget deficit is expected to more than double this year compared with last year, the Congressional Budget Office estimated Tuesday. The federal deficit is projected to hit $407 billion in the fiscal year that ends Sept. 30 ...

The assumptions in the CBO report are very optimistic, and the structural budget deficit will likely be worse than their forecast.

Also, to be accurate, this is the Unified Budget deficit. The General Fund deficit (the responsibility of the President) will be over $600 billion this year. This will put the National Debt close to $10 Trillion when the next President takes office in January 2009 (not counting any impact from the Paulson Plan for Fannie and Freddie).

What ever happened to that Joshua B. Bolten guy? (Yes, I know he is now Chief of Staff). Bolten kept telling us the budget deficit would be cut in half by the time President Bush left office.

We have arrived at this point largely because of this President’s and this Congress’ pro-growth policies, especially tax relief. Those policies have strengthened the economy, which is now producing better-than-expected tax revenues.
Joshua B. Bolten, July 2005

That statement was never accurate. Tax revenues increased in 2005 primarily because of the housing and credit bubble, and the improvement was a short term illusion. Now we are left with a massive structural budget deficit.

Note: there are many misconceptions about the budget and the National debt; too many to cover in this short post. But here are three key points:

Sometimes we see articles like this one that discuss future liabilities: A $75 trillion fright fest. But future liabilities should be discussed in terms of future income and GDP. As a percent of GDP, these liabilities aren't quite as scary.

If we look at the largest fiscal problems facing the U.S., they are in order: 1) health care, 2) the structural General Fund deficit (excluding health care), and 3) Social Security Insurance. In fact the potential shortfall for Social Security Insurance is dwarfed by the other two problems. We wouldn't know that from either presidential candidate.

If we are serious about the issues, the fiscal discussions should focus on health care and the General Fund deficit.

Fiscal discipline is difficult and requires constant vigilance (like a healthy diet). Sometimes voters can be enticed by the siren song of tax cuts that are really tax shifts. A tax cut, without a spending cut, resulting in a deficit is a tax shift; the taxes have been shifted from current taxpayers to future taxpayers. Like everyone, I'd like to pay less taxes, but not at the cost to future taxpayers.

This budget disaster was very foreseeable, but we wouldn't know that listening to Grenspan in 2001 or Bolten in 2005.