OMB’s 2009 Deficit Estimate is Likely Too High

As expected, the new budget projections from the Office of Management and Budget show an estimated deficit of $1.58 trillion in the current year (which ends on September 30).

In their coverage of the dueling budget releases, many members of the media are noting that this estimate is almost identical to the $1.59 trillion estimate released by the Congressional Budget Office. Thus, it may appear that OMB and CBO reached similar conclusions about this year’s deficit.

That is not correct.

OMB and CBO use different accounting for a growing part of the budget — the federal take-over of Fannie Mae and Freddie Mac. If you adjust for those accounting differences, an apples-to-apples comparison shows that OMB’s projection of a $1.58 trillion deficit should be compared to a CBO estimate of $1.41 trillion. (For details, see the table on p. 2 and the box on pp. 8-9 of CBO’s report.)

In other words, using identical accounting, CBO is projecting a deficit that is almost $200 billion less than projected by OMB.

Here’s how it works:

Last September, the federal government put Fannie Mae and Freddie Mac into conservatorship, a sort of limbo between being private firms and government agencies. As part of that arrangement, the government committed to making cash injections to prevent the net worth of either firm from becoming negative. As of July, those payments amounted to about $85 billion.

OMB treats those payments as outlays — i.e., government spending — that flow through into the deficit.

CBO, however, believes that the Fannie Mae and Freddie Mac should have been completely consolidated into the government budget when they were taken over. As a result, CBO believes that the budget cost this year is not just the money that’s going out the door, but also the estimated amount of future losses from the government commitments.

CBO estimates that payments to the companies this year will total $112 billion, but the fully consolidated cost is much higher: $291 billion.

CBO’s official estimate of the budget deficit includes that higher $291 billion figure. If you adopt OMB’s accounting convention, however, the appropriate amount to include would be $112 billion, i.e., $179 billion less.

Using OMB accounting, CBO thus estimates that the 2009 budget deficit will be $1.41 trillion, much lower than the $1.58 trillion OMB estimate.

In principle, this disparity could be explained by CBO being too optimistic, OMB being too pessimistic, or something in between. However, my guess is that CBO is closer to right here. There are two reasons for this.

  • As I mentioned in a recent post, it makes sense for the Obama administration to let “good new” about the budget come out in two steps. Of course, it’s hard to get too happy about such a gigantic deficit but still it helps the Administration to be able to report that deficit figures are lower than previously predicted. If the final deficit for 2009 comes in closer to the CBO number, the administration will be able to make such a claim again.
  • When I was back in government — both at CBO and at CEA — I got the sense that OMB’s mid-session review almost always overstates spending. Not for any political reason, but for a simple human reason: Agencies have plans to do things that involve spending. When OMB asks the agencies how much they intend to spend, the agencies respond with their plans. In practice, however, spending takes time and those plans are often unfulfilled. As a result, year-end spending often falls below what agencies predict during the summer. My guess is that CBO does more to adjust for that than OMB does. Which may explain the disparity in their spending assumptions: OMB projects $3.65 trillion in spending this year while, on an apples-to-apples basis, CBO projects $3.51 trillion.

I bet spending — and therefore the deficit — comes in closer to the CBO figure.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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