More on the Mid-Session Review

Over at his own blog, Donald Marron does a good job getting out additional details on the OMB mid-session budget review that will be released next Tuesday.

According to Donald, spending will be lower mainly because the funds the White House included in its proposed budget for an additional round of financial bailouts won’t be needed, and because the costs of the first round of financial bailouts will be less than originally expected.  Other spending will be $17 billion less than previously forecast but revenues will be $83 billion less than had been projected.

So the estimated deficit falls to $1.58 trillion.

Several points to keep in mind as next Tuesday approaches:

1.  The imperfections of the English language virtually force the use of some version of the phrase “deficit will be less” when describing this situation.  That’s true: if the mid-session’s numbers are correct, the deficit will indeed be less than had been expected.  And that’s definitely good news.

2.  But the deficit won’t be less than it was last year; it will grow from $455 billion in 2008 to whatever the actual number ends up being in 2009.

3.  But while you obviously can compare the 2009 deficit to what occurred in 2008, the comparison is specious at best.  The 2009 deficit is being incurred in a far different economic environment than the one that existed during fiscal 2008 and that renders the comparison of 2008 with 2009 rather meaningless.

4.  Deficits always need to be considered in context.  A large deficit like the one the U.S. will run this year is more appropriate given the current economic situation than a smaller deficit when the economy is growing substantially.

5.  The George W. Bush administration was heavily criticized for saying it would cut the deficit in half from a projected level that never actually occurred.  The Obama administration is not making a similar claim.

6.  The Obama White House deserves some credit for managing the financial situation so that the additional bailout was not needed and so the costs of the bailout already in place was less than had been expected.  It deserves some credit if for no other reason it would have received much of the blame had the numbers gone in the other direction.

7.  But let’s not go too far.  There has not been — and should not have been — any deficit reduction effort this year.  The changes from the previous forecast are one part good management, one part good forecasting, and one part good luck.

8.  Whatever the deficit is in 2009, the real budget challenge for the Obama administration will come next year.  That’s when, assuming that the economic recovery it is forecasting actually happens, fiscal policy will have to rapidly reverse course and taking serious steps to reduce the deficit will be required.

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