Rosier economic assumptions
Budget projections are highly dependent on changes in economic growth. A robust economy means more people are employed, individuals and businesses are earning more, and fewer people are reliant on social safety net programs. This translates into higher tax revenue and lower government spending. Even seemingly small fluctuations in economic growth can have significant implications on deficits. In February, the CBO estimated that if economic growth were just one-tenth of one percent lower each year over the next decade, it would increase deficits by $311 billion over the period.
Obama’s budget assumes that economic growth will average 2.7 percent annually over the next decade, which compares with a 2.4 percent estimate from the CBO. This helps explain why even before considering the effects of a single Obama proposal, the White House’s 10-year deficit forecast goes down to $7.1 trillion – an instant reduction of $800 billion compared with the CBO estimate.
To be sure, economic forecasts are consistently unreliable, so it may turn out that the White House economic assumptions prove closer to reality than the more pessimistic CBO estimates. But it’s worth noting that in the past, the Obama administration has tended to overestimate growth. For instance, in Obama’s fiscal year 2011 budget, even after the depth of the nation’s economic crisis was apparent, the White House estimated that real growth in gross domestic product would average 4.1 percent annually for calendar years 2011 through 2013. The actual average turned out to be 2.2 percent, according to the latest revisions.