The title to President Obama’s budget refers to a new era of responsibility. Responsible budgeting begins with credible economic forecasts. The Obama economic forecast doesn’t merely reflect the return of the famous Rosey Scenario, but puts Rosey in fantasyland. Don’t take my word for it, just look at the numbers compared to what the Blue Chip consensus of private forecasters are saying.
To begin, the Obama budget assumes the economy will contract only 1.2 percent this year. In the current quarter, the economy is already contracting at an annualized rate of over 5 percent, with further contraction expected in the second and third quarters. The Blue Chip consensus forecasts a decline of 1.9 percent, a figure sure to be revised up in March to something closer to the Congressional Budget Office forecast of a 2.2 percent decline for 2009. So even in the current year, the Obama forecast is about a full percentage point off the mark.
Over the course of the next 4 years, from 2010 to 2013, the Obama budget assumption for economic growth exceeds that of the Blue Chip consensus by over a full percentage point each year, and by an average of over 1.3 percentage points. This is not a small difference of opinion. This is a stunningly optimistic forecast that destroys the foundation of the budget document itself.
In total, the Obama budget assumes total output and incomes are 6 percent higher than follows from the Blue Chip Consensus, and of course this ignores the economically destructive consequences of the contents of the Obama budget, including the costly forced restructuring that follows from cap and trade, the reductions in work effort and investment from higher taxes, and the lost output arising from the federal government claiming more resources from the private sector.
Why does this matter to the budget? Because in addition to the many proposed legislative tax hikes in this budget, receipts rise with the economy. And so when the economy is assumed to grow at unreasonable rates, it produces revenue forecasts that are equally unreasonable. Obama assumes receipts of $3.2 trillion in 2013. A forecast consistent with the Blue Chip consensus would reduce this to about $3 trillion, or about $200 billion less.
President Obama says he wants to cut the deficit in half by 2012. He can’t get there with this budget except through fantasies of economic performance. Those fantasies won’t survive reality, and neither will this budget.