The President's Budget Puts the Debt on a Downward Path? Not So Fast...
OMB's projections for the President's FY2015 budget show the debt falling from a post-WWII record next year of nearly 75 percent of GDP down to 69 percent by 2024. In our same-day analysis of the President's budget yesterday, we expressed encouragement that the President continues to propose various revenue and spending reforms to bring down the debt according to his projections. However, we warned that "at the same time, debt levels under the President's budget remain too high, and could be far higher under more pessimistic economic or policy assumptions." This concern is particularly relevant since CBO's projections are more pessimistic, especially with their economic forecast.
In past years, we have provided a preliminary glance of how CBO may score the President's budget, and we've been generally pretty close to the actual results. In fact, in 2011 our estimate of how CBO would score the budget was within 0.2 percentage points of GDP of CBO's published results, which showed debt more than 10 percentage points higher than OMB projected. This year, we will again see how close we can get to CBO.
Based on our rough estimates, CBO may not agree with OMB's finding that the President's budget will produce a declining debt-to-GDP ratio. Instead of debt falling from 74.6 percent of GDP next year to 69 percent by 2024, as OMB sees, CBO could estimate debt reaching closer to 73 percent in 2024, and on a growing rather than falling path.
Starting with CBO's estimates of current law deficits, debt, and GDP this decade, we added in the net savings from OMB's estimates of the President's new investments, reform proposals, and war drawdown path. We also incorporate CBO's estimates for several policies in the President's budget -- including the costs of annual doc fixes, extending the refundable tax credit expansions after 2017, and repealing the mandatory portion of the sequester. We did not, however, rely on previous CBO estimates of some of the President's policies, since some of those estimates produce higher savings than what OMB projects while other estimates show lower savings.
Under our simulation of possible CBO projections, debt would peak in 2014 instead of 2015 and fall much more quickly than OMB projects over the next few years. After reaching a low of roughly 71.5 percent of GDP in 2018, however, debt would start to rise – climbing to 73 percent of GDP in 2024 rather than falling to 69 percent. (The appearance of a relatively stable debt ratio between 2021 and 2023 is largely due to timing shifts that flatten that curve).
Importantly, some of the differences between CBO and OMB relate to how they treat the interaction between policy changes and economic activity. OMB, by convention, projects GDP and other economic variables after assuming the President’s policy is in effect. CBO, meanwhile, makes its economic projections from current law. In this year’s budget, this difference could have a large impact on the estimates, particularly because of the positive growth effects from immigration reform. To account for this, we re-ran our numbers assuming faster real GDP growth over the decade based on CBO's analysis of immigration reform (with some adjustments to reflect the Senate-passed plan). After this adjustment, we find that debt levels would stabilize at about 71 percent of GDP between 2018 and 2024. This is better than our simulated projections that debt levels would increase to 73 percent of GDP, but still not as good as OMB’s projection that they will fall to 69 percent.
CBO's actual estimates of the President's budget could clearly diverge from what we've roughly estimated here and likely will. CBO typically releases an updated set of budget projections in the spring, which incorporates additional information from the President's budget -- which could add even more uncertainty to our simulation. And again, the actual estimates of the individual policies could yield different results.
Budget projections are extremely sensitive to the policy and economic assumptions used. This underscores the importance of building in some wiggle room in case economic or policy forecasts change. While we hope that CBO will agree with OMB that the President's budget would again call for a falling debt path, our initial projections indicate otherwise. In our analysis of the President's budget, we stated that we hope the President will work with Congress over the coming year to construct additional reforms to ensure the long-term debt remains under control. As it turns out, we'll likely need additional reforms this decade as well as over the long term.
Note: Some text has been updated since original posting to include additional details about our re-estimates.