How Close Were Our Estimates of the President's Budget?
Shortly after the President's budget was released, we suggested CBO might be somewhat more pessimistic in its debt projections than OMB. Specifically, we predicted CBO would estimate debt on a slight upward path by the end of the decade, reaching 73 percent of GDP by 2024; by comparison, OMB estimated that debt would be on a downward path, falling to 69 percent of GDP by 2024 under the President's budget.
With last week's release of CBO's Analysis of the President's Budget, we can now test our predictions. While we did not come quite as close as in previous years, our prediction turned out to be fairly accurate. Whereas we thought debt would reach 73.2 percent of GDP by 2024, CBO finds it would be on a parallel course but reach 74.3 percent. (As a reminder, OMB projected debt levels falling to 69 percent). Most of this difference is caused by the fact that CBO did not count $150 billion of temporary corporate tax revenue "because the budget does not provide enough details about the proposal." Had CBO counted that revenue, our debt estimate in 2024 would have been within 0.4 percent of GDP of CBO's.
Importantly, part of the reason OMB is so much more optimistic than CBO deals with their conventions for making economic projections. Whereas CBO's GDP, inflation, and other macroeconomic projections are based on what would happen under current law, OMB's are based on what would happen if the President's budget were enacted. The two scenarios diverge particularly because the President's budget includes immigration reform, which CBO has estimated would increase GDP by over 3 percent by the end of the decade.
If we started with CBO's estimates, but added the economic impact of immigration reform and credited the President with $150 billion of claimed corporate revenue, debt would stabilize at about 71 percent of GDP over the latter half of the ten-year window, an outcome which falls between the CBO and OMB estimates and is almost identical to what we had predicted when immigration reform is included.
Ultimately, there is no way to know which estimates and projections are closest, and none are perfect. The uncertainty associated with budget estimates (and additional uncertainty when incorporating economic effects) highlights the need to put the debt on a clear and unequivocal downward path as a share of the economy. If a plan to do so were enacted and ended up falling short, debt would likely still remain stable as a share of GDP. If instead the debt grew even more slowly, the additional debt relief would help to reduce interest costs, improve budgetary flexibility, and spur more private investment and faster growth.
In other words: when it comes to long-term sustainability, there is ample reason to err on the side of caution.