The most interesting piece of economic news this week was the release of the Congressional Budget Office's "The Budget and Economic Outlook Years 2006 to 2015." This is a confusing document, largely because of the rules governing the way CBO specifies its baseline. Quoting from the report:
At first glance, the current baseline budget outlook may appear to have improved relative to CBO's previous projections, which were issued last September. The cumulative deficit projected for the 2005-2014 period (the 10 years covered by the previous baseline) has declined from $2.3 trillion to $1.4 trillion. However, because of the statutory rules that govern baseline projections, the current baseline omits a significant amount of spending that will occur this year--and possibly for some time to come--for U.S. military operations in Iraq and Afghanistan and for other activities related to the global war on terrorism. Likewise, those rules may have led the September 2004 baseline to overstate such costs.
The apples-to-apples comparison is presented in Summary Table 2, which shows that--apart from the treatment of last year's Iraq and Afghanistan Supplemental--the 10-year deficit has increased by $501 billion, with $371 billion of that change due to legislative changes. The explanation of the changes is:
Since September, when CBO issued its previous baseline, changes unrelated to the treatment of spending for activities in Iraq and Afghanistan have increased the cumulative deficit projected for 2005 to 2014 by more than $500 billion. Among the legislation that contributed to that increase was the Working Families Tax Relief Act of 2004. That law extended several tax provisions, including the 10 percent tax bracket, relief from the marriage penalty, and the increase in the child tax credit--thereby adding $146 billion to the 10-year deficit (excluding debt-service costs). In addition, supplemental appropriations for 2005 provide $11.5 billion in disaster relief for hurricane victims; extrapolating that budget authority through 2014 (following rules for the baseline) adds $94 billion to discretionary spending. Revisions to the baseline caused by changes in CBO's economic forecast were fairly small, reducing the projected 10-year deficit by $41 billion. Other, so-called technical revisions to the baseline--mostly involving revenues--increased that cumulative deficit by $173 billion.
So even knocking out most of the disaster relief (in addition to the military operations in the Middle East), the 10-year picture worsened by about $300 billion due to last fall's legislation. I'd call this a disappointing outcome for fiscal conservatism. I understand that we tend to regard taxes as "bad." But if taxes are bad, then deficits are surely worse, precisely because they are our children's taxes. Let's hope for better as the Budget makes its way through Congress later this year.