Number Crunch: Forecasting the Budget Surplus

PRESIDENT GEORGE W. BUSH:

My budget protects all $2.6 trillion.

SPOKESMAN:

$2 trillion.

McNULTY:

$3.6 trillion.

STARK:

$200 billion.

AIDE:

292 —

STARK:

Oh, $300 billion.

PAUL SOLMAN:

Just what are these numbers everyone's talking about? How are they generated? And how reliable are they? We went to the source: The number crunchers at the Congressional Budget Office.

PAUL SOLMAN:

Deputy Director Barry Anderson was our Virgil leading us through the data.

BARRY ANDERSON:

The Congressional Budget Office is the Congress' budget arm — 230 people who keep score of all the legislation that Congress passes, and take a look at the future and see what the impact is going to be in the future. Mostly we're economists and public policy analysts.

PAUL SOLMAN:

The CBO is a 25- year-old, non-partisan agency of Congress. Its mission: To analyze, estimate, forecast, and count. And it's housed in a building that's seen its share of Washington history.

BARRY ANDERSON:

In fact, the building was built so long ago, before desegregation, that there are two sets of water fountains still remaining.

PAUL SOLMAN:

Its racist days behind it, the building now stores the hundreds of reports CBO does for Congress, as well as the big document of the moment, the CBO's annual budget projections.

BARRY ANDERSON:

Here's our budget and economic outlook that we just issued this past January 31 that projects that the surpluses for the next ten years will be $5.6 trillion.

PAUL SOLMAN:

And this picture shows how that could be possible?

BARRY ANDERSON:

This picture portrays our forecast for labor productivity, which is perhaps the most important factor in terms of our real economic growth projections and the resulting surpluses.

PAUL SOLMAN:

The main reason for a projected surplus in the trillions then, is higher economic growth, which means higher incomes and profits, which means more money in taxes.

But there have been other related revenue surprises — so-called real bracket creep: As Americans earned more because of higher-than-normal economic growth, they climbed into higher tax brackets. Growing income inequality, the rich pay the highest tax rates. As they get richer, faster, so does the Treasury. And finally, the unanticipated 1990s stock market surge meant big capital gains on which people paid unanticipated taxes.

Moreover, as revenues were rising, expenses were ebbing. Defense spending moderated, post-Cold and Gulf Wars. A series of budget agreements further constrained government outlays. We stopped running deficits, thus stopped borrowing money, thus lowered our national interest payments.

And how many of these trends did the forecasters at the CBO anticipate? Well, no more than the rest of us. In fact, as recently as 1997, CBO projected a $36 billion deficit for fiscal year 2001, now projected to end with a surplus of $281 billion. Barry Anderson spent 18 years at the Office of Management and Budget where the executive branch makes its projections. Experience has taught him humility.

BARRY ANDERSON:

If we have the same errors in the future that we've had in the past, then we can expect with some probability that instead of $400 billion surpluses, we might have a deficit five years hence of $50 or $60 billion.

PAUL SOLMAN:

This chart was presented to Congress recently. Where it begins fanning out, it depicts the range of uncertainty for the next five years. The horizontal line is a balanced budget. Above, and we'd rack up surpluses; below, deficits.

PAUL SOLMAN:

I see, so that fan of blue lines represents the bracket of probability given your accuracy or lack of accuracy in the past?

BARRY ANDERSON:

Exactly. Fan of probability — the darker the shading, the more probable our estimate; the lighter the shading the less probable.

ROBERT DENNIS:

What it shows is a measure of uncertainty of future budget projections actually going out only five years. You can see it – it becomes very wide.

PAUL SOLMAN:

Bob Dennis is the CBO's chief budget projector.

PAUL SOLMAN:

So, I see — by the time you're out five years, you are talking about the difference between $1 point something trillion – surplus –

ROBERT DENNIS:

And a small deficit, that's right.

PAUL SOLMAN:

So that's a trillion-dollar difference.

PAUL SOLMAN:

Tom Woodward, in charge of the CBO's tax analysis division, stresses, though, that much of the uncertainty is built in.

THOMAS WOODWARD:

The point to be emphasized though is that this is not a forecast surplus. This is a baseline. That means it's what is going to happen to the budget if there is no change in policy.

PAUL SOLMAN:

The CBO says it knows better than anyone how iffy its projections are, particularly when it comes to recessions. For instance, its recent presentation to Congress clearly showed every recession since 1955, those thick gray vertical lines. But its projections to the year 2010 do not include a major downturn.

PAUL SOLMAN:

The CBO has its critics, of course. On the right, economists like Larry Hunter, who contend the CBO is understating future surpluses by under-projecting revenue growth, especially if there's going to a tax cut.

LAWRENCE HUNTER:

Since 1986, when we had tax reform, and since that time two major tax increases — revenues have grown about 18 percent faster than the economy. Since 1993, revenues have grown about 37 percent faster than the economy. And yet the Congressional Budget Office now assumes that for the next ten years revenues will grow on average less than the economy will grow; it will grow slower than the economy.

PAUL SOLMAN:

You think that's just ridiculous?

LAWRENCE HUNTER:

I think it's ridiculous.

ASSISTANT (answering phone):

Congressional Budget Office.

PAUL SOLMAN:

The CBO responds that lots of unusual events have contributed to the numbers in recent years, and you can't count on them for the future.

BARRY ANDERSON:

The amount of money that we have collected through capital gains is considerably more than what we collected before the late '90s, and is considerably more than we are forecasting in the next decade.

PAUL SOLMAN:

To other critics, however, the CBO is forecasting too much revenue. That is, it is not understating the surplus, but overstating it.

BOB McINTYRE:

They make some very strange assumptions.

PAUL SOLMAN:

Bob McIntyre of Citizens for Tax Justice, a research and advocacy group on the left, says there are inevitabilities that CBO simply doesn't take into account. Population growth, for example, which puts new demands on costly government services; at current spending rates, 1 percent a year per population growth would mean hundreds of billions of dollars in extra expenses over the decade.

Then there are widely expected policy changes like extending the popular $500 per child tax credit that's due to expire. So-called "extenders" would add another $200 billion or so, McIntyre estimates. Add it all up, he says, and big surpluses vanish just when they'll be needed ten years from now for expected shortfalls in Social Security and Medicare.

BOB McINTYRE:

You know, members of Congress – well, a lot of them like the big numbers because then they can pass their tax cuts or their spending plans and pretend they are being responsible. But the Congressional Budget Office numbers are not helping people be responsible, I don't think. They are encouraging people to do things they really shouldn't do.

PAUL SOLMAN:

To the CBO, however, getting criticism left and right is part of the process.

CBO STAFF MEMBER:

As long as everyone is mad at you, you are probably doing your job the right way.

PAUL SOLMAN:

We had one last question: If these numbers are so subject to change, why project them so far ahead? The answer, like so much about the budget process, turns out to be based more on politics than economics. If you project ahead, say, five years, says CBO Director Dan Crippen, politicians will write bills whose costs only kick in at year six.

DAN CRIPPEN:

We are now in this ten-year projection because precisely people are trying to play with the rules. Up until '95 we did five-year projections, not ten. Every time the timeline was set, the budget line, people would draft legislation so that it was effective just beyond.

BARRY ANDERSON:

Good, you've got it up to $5.8 trillion.

PAUL SOLMAN:

So projections go out a decade, while everyone understands that they're most probably off target.

BARRY ANDERSON:

For 200 years, we forecasted not ten years out, not five years out, but only 18 months out. You look at the private forecasters; they're really not doing too much more than that right now. I know the Congress needs estimates that go out ten years and we will supply them. But we make no bones about it that there is an awful lot of uncertainty about what our projections are ten years hence.

PAUL SOLMAN:

Would you bet me $100 that your projections will be within 10 percent of the ultimate reality?

BARRY ANDERSON:

No, and the reason being is because I would bet you many times $100 that Congress will enact legislation that will change those projections somewhere different than the $5.6 trillion. But I don't know what legislation they're going to enact.

PAUL SOLMAN:

And you don't know if it will make the number higher or lower.

BARRY ANDERSON:

Exactly.

PAUL SOLMAN:

At the end of our CBO tour, then, there was only one sure bet: That crunching surplus numbers is a hit or miss proposition.