Busch: US Deficits Worse Than Reported

Yesterday, the Congressional Budget Office released their estimates for the federal deficit for 2010 and it's deceivingly ugly.

"The Congressional Budget Office (CBO) estimates that the federal budget deficit for 2010 will exceed $1.3 trillion-$71 billion below last year's total and $27 billion lower than the amount that CBO projected in March 2010, when it issued its previous estimate. Relative to the size of the economy, this year's deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year's deficit of 9.9 percent of GDP."

For those unfamiliar with the CBO, they are charged with scoring all things legislative to provide Congress with tabs on how the Fisc is impacted by their actions. However, there are certain boundaries that are placed on the CBO that can skew their analysis and generate more optimistic projected outcomes. As an example in the current report, the CBO makes this statement, "...the federal budget deficit would decline substantially over the next two years-to 4.2 percent of GDP by 2012.....Projected deficits total $6.2 trillion for the 10 years starting in 2011, raising federal debt held by the public to more than 69 percent of GDP by 2020, almost double the 36 percent of GDP observed at the end of 2007."

If you don't read the full report and a politician states the above, one would think that the federal deficit is not in dire shape or in need of radically fixing. Fortunately, the CBO is very good at stating their assumptions and these assumptions massively skew the result. Here are the assumptions to get the deficit to decline to 4.2% and 69% debt-to-GDP in 2020:

1. Current laws affecting the budget will remain unchanged.


2. Tax reductions enacted earlier in this decade that are currently set to expire at the end of this year do so as scheduled.

3. No new legislation aimed at keeping the alternative minimum tax (AMT) from affecting many more taxpayers is enacted.

4. The measures enacted in the past two years to provide fiscal stimulus to the weakened economy will expire as currently scheduled.

5. Future annual appropriations will be kept constant in real (inflation-adjusted) terms.

If we are conservative, we can say that at least two of these are false assumptions with the Bush tax cuts (some part) and AMT likely to be continued. The CBO somewhat validates this when they provide state the outlook for an alternative universe. "If, for example, the tax reductions enacted earlier in the decade were continued, the AMT was indexed for inflation, and future annual appropriations remained the share of GDP that they are this year, the deficit in 2020 would equal about 8 percent of GDP, and debt held by the public would total nearly 100 percent of GDP."

For both of these estimates, the CBO uses an optimistic economic outlook such as, "After 2011, the projected growth of real GDP picks up, averaging 4.1 percent annually from 2012 through 2014." Once you understand all the analytic constrictions and optimistic assumptions contained in the report, you also understand fully the implications. The US is in much worse shape than it appears as the amount of federal debt held by the public has skyrocketed by over 50% in two years.

It is this trajectory that causes angst and uncertainty over the direction of US fiscal deficits and taxes for voters, for business hiring and for the markets.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.