Next Tuesday is a big day for budget watchers. The Congressional Budget Office will release its updated budget and economic projections in the morning, and the Office of Management and Budget will release its projections later in the day.
CBO isn’t a fan of leaks, so we probably won’t know much about its updated projections until Tuesday. The Obama administration, on the other hand, will likely allow select tidbits out early, as have previous administrations.
Indeed, Bloomberg is already reporting that an administration official told them that this year’s deficit will come in at “$1.58 trillion, about $262 billion less than forecast in May.”
There are several things you should know about this estimate:
- It isn’t a surprise that the deficit will be less than forecast. I predicted that last week (following up on a similar prediction by Stan Collender).
- The $262 billion difference is largely explained by a single factor: no TARP II. The administration’s original budget included a $250 billion placeholder for additional financial stabilization efforts. Happily, that never happened.
- A second big factor, as reported by Bloomberg, is that spending on bank failures has come in $78 billion lower than originally forecast.
- That good news is partly offset by the fact that tax revenues are projected to be about $83 billion less than originally forecast (presumably because of the weak economy). All other spending is forecast to be about $17 billion less than originally projected.
In short, the cost of fighting the financial crisis has been much lower than forecast in May, while the rest of the budget has done slightly worse than forecast.
This being Washington, there will be some debate about whether the $1.84 trillion figure from May is the right benchmark for evaluating whether the deficit is lower than forecast. That figure (the “policy deficit”) reflected not only the administration’s expectations about how the economy was affecting the budget, but also the budget impacts of its policy proposals, including the potential TARP II. At the time, the administration also made a second forecast that did not include any policy changes. That “baseline deficit” was $1.62 trillion, almost identical to the new estimate. Folks who use the baseline as a benchmark will thus conclude that the deficit is essentially in line with earlier expectations.
Note: The estimates of this year’s budget deficit will get lots of press (and blog) attention, but they are by no means the most important information in the new projections. The real question is what 2010, 2011, and subsequent years look like. We know the deficits will be scary-looking, but we will have to wait until Tuesday to find out just how scary.