The Congressional Budget Office does a decent job of making projections on the budget…usually. What usually throws this organization off is the government ends up spending more than projected. This time I think CBO is too optimistic in its projections, and it isn’t just based on the inevitable spending overruns by our elected “leaders.”
Above is a chart showing the expected federal outlays and tax receipts through 2020. As you can see, the dark blue line, spending, is expected to remain high through 2010 to combat the recession, but it drops precipitously after that through 2018 when it starts to rise again due to Social Security and Medicare shortfalls. The CBO bases this off current projections, but does anyone really believe that the government won’t continue its prolific spending? We know there will be more stimulus because this economic funk is not going to go away quietly. As I mentioned, the CBO does a nice job here usually. There errors tend to be due to new spending programs that are introduced as time progresses.
Where I see the CBO’s miscalculation is on the revenue side. The CBO is projecting a parabolic increase in tax receipts starting this year. In other words, the CBO is expecting a huge economic expansion. This is the only way we can get this kind of growth. Either that, or the CBO is basing its decision on new taxes, which haven’t been disclosed to Americans. As far as I see, there are no new taxes taking place this year unless the current health care bill is passed.
This increase in revenue is beyond any other recession. For the past recessions (1981, 1991, and 2001) the tax revenue returned quickly, but it looks like a 45 degree angle in growth. The current projection looks like an 80 degree increase. This is clearly too optimistic. I would expect revenues to be even lower than previous recessions since this is a balance sheet recession, not an inventory led downturn.