President Obama's proposed $3.55 trillion budget for FY10 is based on assumptions that are, in some cases, more optimistic than CBO projections. The bottom line is also based on a very unlikely event -- that Congress approves the wide array of policy changes the administration spelled out today in its preliminary budget document. According to OMB, the budget deficit for this fiscal year will top $1.75 trillion and then start declining, to $1.17 trillion in FY10 and to $532.6 billion in FY13. Obama is not the first president to make such assumptions -- Council of Economic Advisers Chairwoman Christiana Romer today became the latest in a long line of presidential advisers from both parties to face questions of being too optimistic in her forecast. "I'd reject the premise that we're noticeably rosier," she said, calling the underlying projections "an honest forecast ... These were the numbers that came out, and we feel very confident that they're appropriate."
The major differences between the forecasts of the CBO and administration lie in their GDP growth projections and U.S. unemployment estimates. In both cases, the CEA projects a faster and more robust recovery, based in large part on economic policies that the administration is pushing Congress to approve. The budget assumes that GDP will grow by 3.2 percent in 2010, which is more than double the CBO's 1.5 percent estimate. It is also considerably more than the Blue Chip Consensus of 2.1 percent. Romer said the administration expects the GDP's decline to "bottom out" by the middle of this year, with growth resuming by the end of the year. Similarly, on unemployment, the budget projects joblessness of 7.9 percent in 2010, while the CBO has it at 9.0 percent, closer to the Blue Chip Consensus of 8.7 percent.
Romer said the gap between her forecast and the CBO's was understandable. "A crucial thing ... about the CBO forecast, it is pre-policy," she told reporters. "And if there was ever a time when we think policy's going to contribute something, now is the time." She joked that she also benefited from "a lot of inside information. We knew what the plan was we were going to put in place ... But more fundamentally, we knew what we were planning to do in terms of the financial rescue and feel very strongly that that's something that's going to be very good for getting lending going, and job creation."
OMB Director Orszag said any forecast is tough these days. "You have to realize we're in a period of significant uncertainty about both the ... the economy and financial market stresses. We wanted to be responsible and err on the side of having numbers that had a contingency or placeholder in it in case that was necessary." He said the GDP and employment numbers are more optimistic than CBO's because the administration's estimates factor in the economic stimulus plan enacted by Congress. Orszag said critics will attack many of the numbers, including those on the deficit. "Some may want more. Some may want less. I think in some sense we're being hit simultaneously for having things that are too painful and not doing enough deficit reduction at the same time. And obviously, you know, it's either one way or another, folks. This is an honest budget. It's a responsible budget."
This article appears in the February 28, 2009, edition of National Journal Daily PM Update.