Fuzzy Math Undermines Budget Credibility

As Congress prepares for its Memorial Day recess, the Senate has made no progress in passing a budget resolution for fiscal 2013. It has also rejected President Obama’s budget in a 99-0 vote.

Congress and the White House cannot agree on anything budget-related -- not even on the question of whether the president’s 2013 proposed budget will raise or lower the deficit. The White House calculates its 2013 budget will reduce the deficit by $4 trillion, whereas the Congressional Budget Office estimates that the same budget will raise the deficit by $3.5 trillion.

The debate over these figures shows how budgeters use fuzzy math to hide fiscal realities from voters.

As it is required to do by law, the CBO estimates the effects of White House budget proposals 10 years in advance. If current policies remain unchanged, the CBO estimates the federal budget deficit will be $2.9 trillion over the next decade. That is called the baseline estimate.

Under the president’s policies, without accounting for their macroeconomic effects, the deficit would increase to $6.4 trillion over the next decade -- that is, $3.5 trillion more than the baseline. If you include the budget’s macroeconomic effects, the deficit increases under Obama’s budget to about $6.55 trillion over the next decade, or $3.65 trillion above the baseline.

(The macroeconomic effects include a shrinkage of the capital stock due to higher taxes on capital, higher interest rates and ratios of debt to GDP due to increased government spending, and a lower labor supply due to higher transfer payments and a reduction in wages from lower productivity.)

These estimates of the administration budget raise the deficit, in contrast to the White House’s claim that his proposals lower the deficit. In his Budget Message, published in February, President Obama wrote, "Together with the deficit reduction I signed into law this past year, this Budget will cut the deficit by $4 trillion over the next decade."

So how can he say this?

The reason is that he is using a different baseline. The CBO’s baseline budget deficit is $2.9 trillion over 10 years. This reflects current law, including the expiration of the Bush tax cuts. The CBO is required to estimate new policies, such as the president’s 2013 budget, against a backdrop of current law. The White House uses a different baseline of a deficit of $8.7 trillion over 10 years, and cuts it to $6.7 trillion.

A large part of the difference stems from the fact that Obama’s budget proposal assumes that the Bush tax cuts do not expire. This allows him to count expiration of the Bush tax cuts for couples making more than $250,000 annually ($200,000 for singles) as $1.4 trillion in deficit reduction over 10 years. This alone accounts for nearly half of Obama’s asserted budget reductions over the next decade.

In other words, Obama is giving himself a deficit reduction gold star for assuming, contrary to his own intentions, they will not rise without him. The CBO, on the other hand, assumes taxes on all Americans will rise on Jan. 1, 2013, which is what will happen if no new laws are passed. So by its scoring, the deficit increases if current tax rates are kept for low- and middle-income Americans.

Whichever set of fuzzy math assumptions you use, and whether the deficit gets counted as shrinking or expanding, the CBO and the White House both forecast a $6.5 trillion deficit over the next decade. That is something members of Congress should ponder over their recess.

This piece originally appeared in Washington Examiner

This piece originally appeared in Washington Examiner