From the Oval Office to the Corporate Boardroom, It's a Guess on Growth

By Benton Ives, CQ Staff
CQ Today

February 4, 2008

The economic growth assumptions that underpin the Bush administration's budget are more optimistic than comparable congressional and private estimates.

With many economists projecting the economy to slow in coming months -- if not dip into recession -- some analysts questioned the soundness of the White House projections and what they could mean for the government's fiscal health.

"Either [the assumptions] are out of date or their policy recommendations are totally out of whack with their economic projections," said Robert L. Bixby, executive director of the Concord Coalition, a budget watchdog group.

According to the fiscal 2009 budget assumptions released Monday, gross domestic product will grow 2.7 percent in calendar year 2008.

The Congressional Budget Office (CBO), on the other hand, projected in January that GDP would expand by 1.7 percent in 2008. And the Blue Chip Consensus, an average of 50 top private-sector forecasters, sees 2.2 percent GDP growth for this year.

Those assumptions can prove important: economic growth boosts tax revenues and keeps unemployment down, thus lowering the deficit.

In recent years, stronger-than-expected tax revenues have produced consistently smaller budget deficits than preliminary White House projections. But with the economy on increasingly shaky footing -- as a credit crunch and real-estate slowdown drag on growth -- tax revenues now are likely to shrink.

According to administration budget documents, if 2008 GDP were lower than expected by 1 percentage point and unemployment were to rise, the fiscal 2008 deficit would increase by $16.4 billion, as tax receipts fell by $13.8 billion and spending increased by $2.6 billion, particularly on unemployment insurance.

The five-year cumulative effect of a percentage point decline in 2008 GDP would be a $251 billion increase in the budget deficit, the White House said.

Part of the difference between the CBO and White House growth projections could be an accident of timing, said Chad Stone, chief economist at the Center on Budget and Policy Priorities, a left-leaning research group. In crafting the budget, the White House had to "lock in their assumptions in November," Stone said.

Since then the economy has struggled and stock markets have fluctuated dramatically.

A White House spokeswoman said Monday that the budget takes into account some slowing in the economy, while also figuring in the effects of an expected economic stimulus package.

More broadly, the president's budget expects a near-term return to rising deficits. The White House is projecting a deficit of $410 billion in fiscal 2008 and $407 billion in fiscal 2009. That follows three straight years of declining deficits. The fiscal 2007 figure was $162 billion, helped along by those strong tax revenues.

Further out, the Bush administration sees a balanced budget in 2012, but many analysts say the policy assumptions backing that projection are unrealistic.

For example, the budget assumes that Congress will enact Bush's proposal to trim the growth of Medicare and Medicaid by $195.7 billion over five years; that the wars in Iraq and Afghanistan are not funded beyond fiscal 2009; and that the alternative minimum tax is allowed to hit more taxpayers after fiscal 2009.

"You could get much lower revenues over the next couple of years, and I don't see any sudden snapback that would give you a balanced budget by 2012," Bixby said.

Meanwhile, inflation projections from the White House, the CBO and Blue Chip forecasters are more in synch than growth estimates.

The Bush administration sees inflation rising 2.7 percent in 2008, while the CBO and Blue Chip forecasters anticipate 2.9 percent increases in inflation for the year.

In recent weeks, several ominous signs point to a slowdown in U.S. growth. The January employment report showed the economy shed 17,000 jobs last month, the first drop since August 2003. And the Commerce Department reported sharply slower GDP growth of 0.6 percent in the last quarter.

The collapse of the subprime mortgage market has battered the broader housing industry and sparked an abrupt tightening of credit. And consumer spending, which comprises the bulk of the U.S. economy, showed signs of slowing in December.

Concerns about the economy prompted the Federal Reserve to cut its benchmark federal funds rate by half a percentage point on Jan. 30, to 3 percent. Its action followed a more dramatic three-quarters of a percentage point cut on Jan. 22.

Still, the White House, CBO and Blue Chip forecasters all anticipate the economy to rebound next year.

"CBO expects the economy to rebound after 2008, as the negative effects of the turmoil in the housing and financial markets fade," according to the CBO's long-term outlook, published in January.

Source: CQ Today