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Some Deep Breaths On The New Deficit Numbers

OMB director Peter Orszag makes some fair points in response to a lot of the angst the new CBO deficit numbers are inspiring in some quarters. In particular:

First, CBO’s projections, like any budget projections, are subject to a high degree of uncertainty. (Trust me…I know the former CBO Director quite well!) As an example of how much budget projections can shift, at this point last year, CBO was projecting a 2009 baseline deficit of $207 billion. It is now projecting a baseline deficit of about $1.7 trillion. CBO itself has estimated the margin of error around its 5-year deficit projection to be about 5 percent of GDP in either direction—which means the confidence interval around the 2014 deficit is plus or minus about $900 billion.

Also note that a key driver of the new CBO deficit numbers after 2014 are estimates about long-term economic growth—where CBO is somewhat more pessimistic than the consensus.  For example, CBO projects long-term real economic growth that declines to 2.2 percent per year. Blue Chip pegs long-term real growth at 2.6 percent per year and the Federal Reserve forecasts long-term real growth of between 2.5 and 2.7 percent—the same as the Administration, which is projecting real long-term growth of 2.6 percent. These differences may not seem big, but over time they accumulate. And since the deficit is the difference between two much larger numbers—spending and revenue—even relatively small differences in assumptions can have a magnified impact on the deficit. (As an example, imagine that spending is $1,050 and revenue is $1,000, so the deficit is $50. If revenue declines by just 10 percent, the deficit triples to $150.)

Obviously these are pretty big numbers any way you slice them. But it's important to understand that small differences in growth projections can lead to big differences in deficit projections when you're mulling this stuff over. 

--Noam Scheiber