By Chris Wood, Jake Weber, and Vedran Vuk
The Casey Report

Hearing President Obama’s economic peptalks, you might be under the impression that the U.S. needs to keep spending for just a little while longer to stimulate the economy – but then will swear off big deficits.

Reinforcing the point, to address concerns stirred by a Congressional Budget Office (CBO) forecast that the U.S. government will accumulate total deficits in excess of $6 trillion over the next decade, in February President Obama issued an executive order to create a bipartisan fiscal commission.

The commission’s task is to deliver recommendations to the president by December 1 for limiting future deficits to 3% of GDP. (The FY 2009 deficit approached 10% of GDP. The FY 2010 deficit will probably go even higher.)

It’s our contention that the president’s fiscal commission is mostly for show; the 3% limit is just a hoop for the clowns to jump through. U.S. government finances are now past the point of no return; the U.S. government lacks not just the will but the ability to close the gap between revenue and expenditure.

At The Casey Report, we like to focus on facts. Unfortunately, when it comes to government debt, the facts aren't pretty. They show that the country is already sliding towards financial collapse and hyperinflation in a way not dissimilar to the Weimar Republic.
Let’s first look at recent history to see how reliable CBO forecasts have been. In 1999 the CBO issued its 10-year forecast for 2000-2009 (see charts below). It looked as though we were heading into ten years of prosperity that would rescue us from little worries like the trillions in unfunded liabilities of Social Security and Medicare.

As you can see in the charts titled “CBO Revenue Projections 2000 - 2009” and “CBO Outlay Projections 2000 - 2009,” the CBO expected a budget surplus in every year from 2000 to 2009. And not just that, but that the surpluses would grow at an annual rate of more than 13% and would accumulate to $2.5 trillion over the decade.

Click here to enlarge

The next charts titled “Actual Federal Government Receipts 2000 - 2009” and “Actual Federal Government Outlays 2000 - 2009” show how wrong the CBO’s forecast was. One reason it went wrong was that the CBO naively assumed that the abnormally rapid rate of economic growth experienced in the 1990s would continue. It didn't.

Click here to enlarge

A second reason is that the “conservative” Bush administration went on a spending spree – passing Medicare drug coverage and No Child Left Behind, to name two big tickets. While the CBO anticipated ending the past decade with a net budget surplus of $2.6 trillion, the U.S. government actually accumulated the largest deficit ever, a staggering $3.2 trillion. So the difference between the CBO forecast and eventual fact was only $5.8 trillion. (And that's not counting for off-balance sheet unfunded liabilities, such as $60 to $70 trillion for Medicare and Social Security.)

So what does the CBO foresee for the coming decade? And how far from reality is that foresight likely to stray?

In January, the CBO released “The Budget and Economic Outlook: Fiscal Years 2010 to 2020.” This long-term forecast expects the U.S to accumulate an additional $7.4 trillion in deficits during the eleven years beginning with 2010, which reflects an average annual deficit of about $670 billion.

Click here to enlarge

The picture painted by the CBO is by no means rosy, but we think the facts could prove to be much worse. We have already demonstrated that the CBO's assumptions can be wildly off the mark, and there are many ways for things to go wrong in the years just ahead. Here are three of the big ones.  

The Revenue Landmine

The Congressional Budget Office projects total federal revenue of $2.2 trillion in 2010, a 3.3% increase from 2009, under the assumption that current laws and policies remain in effect.

Because of several tax provisions set to expire in December 2010 and what the CBO sees as a strengthening economic recovery, it projects that revenue will rise substantially after 2010, increasing by about 23% in 2011 and by another 11% in 2012.

According to the CBO’s projections, revenue will continue rising nonstop from 2013 through 2020 and will reach 20.2% of GDP. Almost all of the increase is attributed to expected growth in individual income tax receipts.

This forecast relies on the CBO’s expectation that the unemployment rate will average slightly above 10% in the first half of 2010 and then turn downward in the second half of the year. As the economy expands further, predicts the CBO, the rate of unemployment will then continue declining until, in 2016, it reaches 5%, the level that the CBO considers full employment.

The CBO projects annual government receipts to better than double between 2010 and 2020, growing at an average annual rate of 7.8%.

How do these growth projections compare with actual history?

Actual data from 2000 through 2009 show that over the last decade federal government receipts grew at an average annual rate of 0.9%. And the total increase in government revenue between 2000 and 2009 was only 3.9%. Even if we go back to 2007 and 2008, when tax receipts were at all-time highs, the increase from year 2000 levels was only about 25%.

Given the historical record, are we really supposed to believe government revenue will grow at an average annual clip of nearly 8% from now until 2020?

Comparing data during the first four months of fiscal 2009 to the same period for 2010,  government receipts are down more than $80 billion, or 10.4%, from the same period the year before. And remember, 2009 revenues were about 17% below those in 2007 and 2008.

There are countless plausible reasons that revenue might disappoint and not grow as rapidly as the CBO projects – the main ones being that the economy may not expand as expected and that the employment picture won't be as pretty as predicted.

So what happens to projected deficits if instead of growing more than 100% between now and 2020, government revenues only increase by, say, 50% (still a generous amount given recent history)?

Assuming revenue in 2010 matches 2009 and then grows by a total of 50% over the 10 years that follow, the accumulated deficits for the period would be $17.5 trillion, or about $10 trillion more than projected by the CBO.