The Brainteaser of Deficit Math
By Alan Sloan
Monday 08 September 2003
By the time you re finished adjusting for reality, the projected budget deficit is about $7.4 trillion, not the advertised $1.4 trillion.
Sept. 8 issue OK, fans. Summer s over, it s back to school or work for almost all of us, alas. And what better way to tune up our post-vacation brains than to deal with some numbers? Big, important, scary ones. So, to get those synapses snapping, let s look at the figures that emanated from the Congressional Budget Office last week but seemingly vanished into the haze of late August.
You may remember something about a projected $1.4 trillion deficit over the next 10 years and dismissive remarks from the White House about how the numbers are unreliable. And there were reassurances from various gurus that these deficits aren t very big relative to the size of our economy. A fiscal food fight that seems strictly Yawn City. Pass the suntan lotion, dear, let s roll over and bake our other side.
But I ve been back at work for more than a week now. So I read the whole report instead of just the summary. By law, the budget office has to assume that existing laws expire as planned, and that no new programs are added or subtracted. But this report includes numbers that you can use to adjust for political reality. Which I did. First, I counted the $2.4 trillion Social Security surplus, which the Treasury uses to offset its cash shortfall. Then I figured that the last three years of tax cuts will become permanent; that Congress will pass a Medicare prescription-drug package and will also stop the dreaded alternative minimum tax from hitting 30 million taxpayers. These changes add $3.6 trillion to the deficit. So by the time you re done, the total projected deficit is more than five times the aforementioned $1.4 trillion. Call it $7.4 trillion. And I m being generous, assuming we spend nothing in Iraq starting Oct. 1, 2005.
Wall Street has been growing restive about the deficit ever since the White House number crunchers at the Office of Management and Budget said in July they expected a $455 billion deficit (after subtracting Social Security s surplus) for fiscal 2004. That s one of the reasons interest rates have begun moving up lately after their long decline. The Street will probably get even more restive when it returns from the beach and takes a close look at the higher CBO numbers.
What s especially distressing is how the government would presumably cover this deficit. As I said, about a third of the money $2.4 trillion comes from the Treasury s borrowing the Social Security surplus, spending the money and replacing it with IOUs. So a decade from now, the government will owe Social Security about $4 trillion, just as baby boomers begin retiring en masse. I don t see how that debt can be honored without huge borrowings from outside investors that would send rates to the moon, or huge cuts in other programs.
Allan Sloan's Math
Here are the detailed numbers I used to come up with the budget figures in my column. I started with the basic Congressional Budget Office numbers-a projected $3.833 trillion 10-year deficit, less a $2.436 trillion Social Security surplus. The adjustments, including the interest on the higher projected national debt, are from Table 1-6 in the CBO s August, 2003 update, available on www.cbo.gov. I m assuming that we have no Iraq costs after the 2005 fiscal year, which ends on Sept. 30, 2005. The no Iraq numbers are negatives because they make the deficit smaller.
We ll also depend heavily on foreign lenders to close our cash gap. Last year, according to Treasury statistics, foreigners bought 58 percent of the securities that Treasury sold to investors. Some 60 percent of that 58 percent was bought by central banks. Although Treasury doesn t say so, a large percentage of that went to the central banks of Japan and China. So you can imagine what would happen if, for reasons financial or political, either bank stopped buying Treasuries. Or, heaven help us, began selling them heavily.
Normally, it s easy to dismiss long-term budget projections because the biggest projected deficits (or surpluses) come in the last years, when the projections are the most unreliable. But here, the scariest numbers are the closest ones the ones most likely to be reasonably accurate. For fiscal 2004, which starts in about 4 weeks, the budget office projects a $644 billion deficit. This would be 5.8 percent of the U.S. gross domestic product, which approaches the 6 percent record set by Ronald Reagan s 1983 budget deficit. Reagan s deficits set off alarm bells in Washington, he signed onto a huge tax increase and fiscal sanity made a comeback in Washington. Nothing of the sort seems likely these days, given the current administration and Congress.
Trent Duffy, a spokesman for the White House OMB, said, To think you can project the budget 10 years from now is like thinking you can pick the winner of the 2013 Kentucky Derby.
True enough. Then again, the White House s policy seems to be a long-shot bet that the economy will begin growing like mad, miraculously solving our unemployment and deficit problems simultaneously. Meanwhile, our deficits and interest payments grow, which means there s less money for other things, such as fighting AIDS in Africa, fixing the electric grid or cutting taxes. Even in our new school year, there s no such thing as a free lunch.
Jump to TO Features for Friday 19 September 2003