In this era when almost all federal budget process deadlines are routinely missed or completely ignored, it’s hard to believe that the fiscal 2014 mid-session review of the budget was released yesterday, a full week ahead of the July 15 statutory deadline.
The mid-session review was released with virtually no fanfare. In fact, many of my budget geek friends who, trust me on this, live for the release of federal budget documents, didn’t know it had been released until this morning.
If you’re from the camp that thinks the deficit has been and continues to be too high, the mid-session review will put a smile on your face. According to OMB, the 2013 deficit will be $214 billion less ($759 vs $973) than what was estimated earlier in the year in the president’s budget (take a look at Table 1). Most of this reduced forecast is the result of three factors: a $65 billion increase in revenues, a $43 billion reduction in discretionary spending and a $71 billion reduction in mandatory spending. Overall, spending is projected to be $154 billion lower than the original projection.
Again, if you think the deficit has been too high, the problem with this much lower forecast is that two of the three may well be one-time events. The increase in revenues mostly came from individual taxpayers accelerating income into 2012 in anticipation of the 2013 tax rate increase that was part of the fiscal cliff, and the $71 billion in what’s classified as lower mandatory spending is the result of Fannie Mae and Freddie Mac running a surplus rather than a deficit.
The third factor — the reduction in discretionary spending — is almost completely the result of the sequester that went into effect on March 1.
Revenues could be higher than anticipated in 2014, but that will have to happen because of faster-than-expected economic growth. That could be difficult given that the White House is already forecasting that the economy will grow by 4 percent in 2014.
A legislated revenue increase isn’t even remotely likely, and the acceleration of 2013 income into 2012 means that revenues for 2013 (which will be collected in 2014) should be lower than past estimates.
Fannie and Freddie could earn another of what is still an unexpected surplus next year, and Congress and the president will either agree to the 2014 spending cap or another sequester will occur that will reduce discretionary spending.
And, of course, other unexpected events could have a positive budget impact. For example, suspension of U.S. military and foreign aid to Egypt and an earlier-than-projected withdrawal of troops from Afghanistan have both been discussed in recent days.
But OMB is forecasting none of these things in the mid-session review. As a result, it shows the fiscal 2014 deficit only marginally lower than 2013 both nominally ($750 billion vs $759 billion) and as a percentage of GDP (4.5% vs 4.7%).
Over the 10-year period from 2014 to 2013, OMB does show the deficit flattening out in the $500 billion to $600 billion range in nominal terms but falling dramatically as a percent of GDP from 4.5 percent to 2.1 percent.
The value of the long-term numbers should be seriously discounted, however. As this mid-session review shows conclusively, projections from just a few months ago can be…and often are…significantly incorrect. A projection of what the deficit will be a decade from now — that is, five congressional elections, two and a half presidential elections, countless natural and manmade disasters, who-knows-how-many policy changes and at least a handful of economic ups-and-downs — is far more likely to be accurate by accident than because of excellent analysis.