Projections vs. Scenarios and Why Politicians Should Care – Orange County Register

The east front of the Capitol building stands in Washington, DC. Photographer: Andrew Harrer/Bloomberg

Congressional Budget Office projections provide valuable insight into how much of your income is spent and reveal the long-term consequences of our government’s current fiscal policies—you can endure them, and your children certainly can. However, as with most other predictions about our future, these numbers should be taken with a pinch of salt. The same should be true of the claim that CBO forecasts confirm anyone’s fiscal history.

Much can and likely will happen that will render the forecasts moot and our fiscal prospects much bleaker. Unforeseen events, economic changes and political decisions make them less accurate over time. CBO knows this and recently released alternative scenarios based on different sets of assumptions, and it doesn’t look good. It is surprising that more politicians, now with a more realistic range of options, do not behave this way.

First, let’s summarize what the situation looks like under the usual assumptions about rosy economic growth, inflation and interest rates. Due to continued overspending, this year’s deficit will be at least $1.6 trillion and will increase to $2.6 trillion by 2034. Society’s debt amounts to approximately 99% of our economy (measured by gross domestic product) annually and will reach 116% by 2034.

The only reason these numbers won’t be as high as predicted last year is because several House Republicans fought hard to impose some spending limits during the debt ceiling debate. The long-term outlook is even more dire: national debt will reach 166% of GDP within 30 years, and the overall federal debt will reach 180%.

No one should be surprised. It’s true that the Covid-19 pandemic and the Great Recession have made things worse, but we’ve been on this path for decades.

Unfortunately, if any of the assumptions underlying these forecasts change again, the situation will become much worse. This is where CBO alternative pathways help. Policymakers and the public can better see the potential risks and opportunities associated with different fiscal policy choices, enabling them to make more informed decisions.

For example, CBO emphasizes that if the labor force grows annually by just 0.1 percentage point less than originally projected – even if the unemployment rate remains the same – slower economic growth would lead to a deficit $142 billion larger than baseline projections in 2025–2034 Similarly, a modest slowdown in the productivity rate would lead to an additional deficit of $304 billion over this period.

In 2020, the prevailing theory among those who argued that we shouldn’t worry about debt was that interest rates were extremely low and would stay low forever. As if. These guys have since learned what many of us have known for years: that interest rates can and will rise when things get bad enough. So what will happen if interest rates continue to rise above the levels CBO has included in its forecasts? Even a modest increase of 0.1 point above the baseline would result in an additional $324 billion in deficit over the 2025–2034 period.

The same applies to inflation, which, as every buyer can see, has not yet been defeated. If inflation, as I fear, does not subside as quickly as the CBO has predicted – largely because debt accumulation continues unabated – it will slow growth, raise interest rates, and significantly widen the deficit. Specifically, an increase in overall prices of just 0.1 point over the CBO baseline would result in higher interest rates and a deficit $263 billion larger than projected.