Last week the Obama administration released its new budget projections, and the overall deficit was revised upward. The above chart shows the budget deficit as a percentage of GDP based on the Obama administration’s February 2009 budget projections and on their new projections.
In March, I said that the Obama administration’s budget was optimistic (here’s a link to several articles I wrote back then on the budget: http://chartingtheeconomy.com/?cat=7). So, I hope no readers were surprised last week when the administration came out with a revised budget projecting the 2009 deficit would increase by $89 billion and the 2010 deficit would increase by $87 billion. I think there will be another negative revision later this year because the assumptions in the administration’s budget are still too optimistic.
First, I think the budget is too optimistic in its growth projections. It has real GDP declining only by 1.2% in 2009 and growing by 3.2% in 2010 (4% in 2011, and 4.6% in 2012). The next chart shows three differing views of budget year 2009 year-over-year real GDP growth. As you can see the Obama administration’s projection is far more optimistic than the Blue Chip concensus and the Congressional Budget Office (CBO) projection.
Second, the administration’s unemployment figures are too optimistic. It has the 2009 average unemployment rate at 8.1% and the average for 2010 at 7.9%. The unemployment assumption is an important input in the budget process. A higher unemployment rate has several adverse impacts on the deficit including: 1) higher government expenditures on unemployment benefits, 2) lower income and payroll tax receipts, and 3) reduced consumer spending which leads to lower GDP growth. The chart below shows how the unemployment rate would need to trend in coming months in order for the Obama administration’s assumption to be accurate. Note: The U.S. budget year starts October 1st of the prior year (so we are more than halfway through the 2009 budget year).
The projections in the above chart hit the administration’s assumption of a 8.1% unemployment rate in 2009 and 7.9% in 2010. As you can see in this example the unemployment rate would need to start improving now and continue to improve steadily over the next 17 months. Of course the administration’s assumption can also be hit if the unemployment rate continues to increase in the next few months. If this happens, the recovery would need to be much more extreme. I believe the administration’s unemployment assumption in their budget projections will be very difficult to hit.
Given the Obama Administration’s optimistic assumptions I think we are in for another negative revision in the federal deficit later this year. This administration definitely does not have a budget strategy to set low public expectations, and then exceed them. Just the opposite. It appears that their budget strategy is to set optimistic public expectations, and then to gradually revise the expectations downward. Get use to it. The administration’s budget numbers are still a best case scenario.
Data Source:
Budget of the U.S. Government Fiscal Year 2010, Updated Tables May 2009. Table S-9, S-13, and S.14. Table S-13 has the April 2009 Blue Chip Economic Indicators (Aspen Publishers, Inc.), and the CBO’s March projections.
The Blue Chip Economic Indicators is published monthly by Aspen Publishers, Inc. It is a poll of America’s top business economists.
U.S. Bureau of Labor Statistics
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