With President Obama’s speech on job creation in the United States in mind, I thought it was time to take a look at the most recent Budget and Economic Outlook from the Congressional Budget Office, released in August. These numbers will give us some idea of whether America can afford to make the expenditures necessary to increase the number of jobs so that those who have been unemployed or underemployed for long periods of time can get on with their lives.
The CBO projects that this years’ budget deficit will reach $1.3 trillion for the 2011 fiscal year, the third largest deficit in the past 65 years and the third year in a row that the deficit has been among the top three in history. This massive deficit amounts to 8.5 percent of GDP. To put this number into perspective, the deficit-to-GDP ratio for the past 40 years has averaged 2.8 percent.
While the U.S. economy has recovered somewhat from the depths of the Great Recession, it is quite apparent that the economy is hardly firing on all cylinders. With unemployment stubbornly above 9 percent (U3) and rather anemic real GDP growth of only 1.0 percent in the second quarter of 2011 following real GDP growth of only 0.4 percent in the first quarter of 2011, it should surprise no one that economic output will remain well below its potential. In this most recent Budget and Economic Outlook, the CBO projects that GDP will growth by 2.3 percent this year, a number that is increasingly looking terribly optimistic. The CBO estimates that GDP will grow by 2.7 percent in 2012 (highly unlikely given that it appears that a recession is either looming or already in place) and that changes in federal taxation and spending policies in 2013 will impose restraint on economic growth. The CBO is most optimistic about the period from 2013 to 2016 when they project that GDP will grow by 3.6 percent annually with a drop to 2.4 percent annually in 2017 to 2021.
If you have your fingers crossed in the hope that unemployment will soon drop to reasonable levels, you're in luck according to those employed at the Congressional Budget Office. The CBO expects that unemployment will remain at 8.9 percent this year, 8.5 percent in 2012 and rather surprisingly will drop to 5.3 percent in the period between 2013 and 2016 and to 5.2 percent between 2017 and 2021.
Here is a table summarizing the CBO’s projections for GDP growth, inflation, unemployment and interest rates for the next decade:
Note that the CBO is projecting a return to a higher interest rate environment for the period following 2013, a projection that must send a shudder through those responsible for accumulating a debt of $14.695 trillion.
Now that we have all of these projections from the CBO, let’s look at the projections for deficit-to-GDP for the next decade. In 2012, the CBO projects that the deficit will drop to 6.2 percent of GDP, 3.2 percent in 2013 and then average 1.2 percent of GDP between 2014 and 2021. Total cumulative deficits for the period between 2012 and 2021 will reach $3.5 trillion with debt reaching 61 percent of GDP in 2021. This number is far lower than the original $6.7 trillion cumulative deficit projected by the CBO in March of 2011 largely due to the actions of August’s Budget Control Act which, while it will allow the debt to rise by $400 billion (and an additional $500 billion at the President’s request), is supposed to keep spending under control and at a level that is reduced compared to the growth of the debt. My suspicion – ain’t gonna happen but the CBO is apparently still a believer.
Here is a graph showing the projected deficit-to-GDP numbers for the next decade:
Notice the growth in the cute little turquoise section at the top of each bar? That’s the amount of interest owing on the debt as a fraction of GDP. This number will likely be far worse if interest rates rise to historical levels sooner rather than later, throwing the deficit-to-GDP numbers off projection.
Here is a graph showing the actual and projected debt-to-GDP numbers for the period from 1940 to 2021:
In large part, the decline in deficits is due to the expiration of tax provisions enacted under Bush II. The CBO also hopes beyond all hope that tax revenues will grow as the economy grows, a rather pie-in-the-sky prognostication. The CBO projects that revenues will rise from 16.8 percent of GDP in 2012 to 20.2 percent in 2014 and 20.9 percent in 2021. Interestingly enough, three-quarters of the growth in revenues over the next ten years is projected to come from higher tax receipts from individuals. Those lucky corporate bastards are off the hook yet again!
If you look at the scary little dark colored wedge labeled “Continuation of Certain Policies”, you’ll note that the debt-to-GDP projections look far worse. If the government elects to extend tax cuts and prevents payment cuts for certain Medicare services, the deficits will actually be $5 trillion higher than the CBO’s baseline case resulting in a debt-to-GDP level of 82 percent by 2021.
It is fascinating to see how all of the permutations and combinations of GDP growth, unemployment, interest rates and government spending and revenue could interact to create financial stress for the economy of the United States and the rest of the world. The world’s economy is in an extremely fragile state and all it will take over the next 10 years is for one of the many factors influencing economic growth and debt accumulation to fall out of line, creating financial chaos. Let’s hope that this projection by the CBO is correct, although my suspicion is that partisan politicking will somehow lay waste to the best laid plans. All we need to do is look back to the beginning of August 2011 to see how difficult it was to get Washington to agree to do what American voters want and need. While it's jobs that America needs, D.C's fiscal high wire act may prevent it from undertaking meaningful action that will help those of us that live on Main Street.
As economist Herbert Stein put it "...if something cannot go on forever, it will stop". How profound.