All the President's Budget Assumptions

The 2011 budget contains more rosy scenarios than a romance novel.

"Another manifestation of irresponsibility is the large budget deficits we are inheriting," wrote President Barack Obama in last year's budget message for fiscal year 2010 (which runs from October 2009 through September 2010). "These deficits, over time, will harm economic growth and impose burdens on our children and grandchildren," he continued. "For the past eight years, in a time of economic growth, the government spent recklessly on tax cuts for the few and hand-outs for the well off and well-connected, mismanaged billions of dollars in taxpayer money, and failed to honor the responsibilities we have to future generations."

Given his firm grasp of the consequences of the situation, you would have thought that the president would cut government spending and try to reduce the deficit. Sadly, the table below shows that you'd be wrong.

Indeed, contrary to the promises Obama made last year, the deficit grew by over 10 percent between FY2009 and FY2010. And spending, which was projected to go down in FY2010 to $3,552 billion from its $3,938 billion FY2009 level, will actually climb by an estimated 6 percent. In total dollars, the deficit for FY2010 is projected by the government to reach $1.56 trillion (last year, Obama projected it would be $1,171 billion).

2009 '" 2010 Changes

And what did President Obama request in his recently released budget for FY2011? In his latest budget message he writes:

To help put our country on a fiscally sustainable path, we will freeze non-security discretionary
funding for 3 years. This freeze will require a level of discipline with Americans' tax dollars and a number of hard choices and painful tradeoffs not seen in Washington for many years. But it is what needs to be done to restore fiscal responsibility as we begin to rebuild our economy.

Here's the rough plan in table form.

FY 2011 Budget Basics

Expressed as a percentage of Gross Domestic Product (GDP), that means total government outlays will equal 25.1 percent of GDP, the second highest rate since 1945 (the highest was 25.4 percent for FY2010). Federal revenues will amount to 16.8 percent of GDP (up from its 14.8 percent level in FY2010). And the budget deficit will come to 8.3 percent of GDP, down from its FY2010 level. To put that number is perspective, remember that during the 1980s, a decade known for high deficits, the deficit average was 4 percent of GDP.

The only sector where spending might decrease is the area subject to the spending freeze (that area covers 13 percent of the budget, but the freeze won't take effect until next year). Since the budget came out, I have spent a long time trying to figure out how the freeze will work and exactly what it entails. Based on the budget data just released, however, there wasn't enough information available to answer that question as of this writing.

So much for transparency. As economist and former Congressional Budget Office Acting Director Donald Marron put it on his blog after the budget numbers were released on Tuesday: "To fully understand the trajectory of non-security discretionary spending, you need to consider such obscure bits of budget arcana as the obligation limitations used for transportation funding (ob lims, to the initiated), the proposed conversion of Pell grants from discretionary to mandatory spending, the reassignment of bioshield from security to non-security spending, and the fact that Census spending is particularly high in fiscal 2010 because of the decennial census. I haven't actually crunched the numbers, but that's not my point tonight. Instead, my point is simply how hard it can sometimes be to match budget reality to budget communications."

It is also important to note the increase in defense spending (4.1 percent). Such an increase is not surprising, given that Obama is increasing troop levels in Afghanistan without withdrawing troops in Iraq any faster than President Bush would have done. But anyone who thought that Obama would be less of a hawk than his predecessor should have realized by now that this is a myth. In fact, this year the defense budget is the biggest in total real dollars in U.S. history.

So spending is going up. And yet the president predicts the FY2011 deficit will shrink from its FY2010 level of $1.56 trillion to $1.2 trillion. Better yet, the president projects that by 2014 the deficit will decrease by more than half to reach $706 billion.

How does Obama hope to get there? He pencils in an 18.5 percent increase in revenue between FY2010 and FY2011.

2010 '" 2011 Changes

Where will all this new money come from? First, the president assumes revenue from letting the Bush tax cuts expire on income earners making more than $250,000 per household. Then he assumes revenue from closing "loopholes" on the corporate income tax sides. (What he calls loopholes are just exemptions that were built into the corporate income tax system to help U.S. companies competing on the international market.) If Obama succeeds in repealing these exemptions without reforming the corporate tax code, however, there is no doubt that American companies will have a harder time making a buck and that the revenue stream they bring in will shrink.

Finally, the president's revenue estimate relies on optimism. His projected GDP growth and unemployment numbers are very rosy. In FY2011, the president assumes that the economy will grow by 5.1 percent (see Table S-13 of the Summary Tables). He assumes that the economy will grow by 6 percent in 2012. And he expects the unemployment rate to decline. While his jobs programs have failed miserably so far, he anticipates that next year the unemployment rate will drop to 9.2 percent. Better yet, in 2012 it will drop to 8.2 percent and will reach 6.5 percent in FY2014.

Given how unrealistic these projections are, relying on an 18.5 percent increase in revenue this year is simply not credible. Which puts the other numbers in President Obama's budget'"which is already nothing to write home about'"in an even harsher light.

Veronique de Rugy is an economist at The Mercatus Center and a columnist for Reason magazine. Read her Reason archive here.