$600 b. 4% of GDP Deficit Looms In Fiscal 2009
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Start With OMB's $482 b. FY09 Deficit. Normally, I would start with the Congressional Budget Office's estimate, but that won't be available until September 9.
First, Subtract Administration Policy Proposals Which Won't Pass Congress. Very little of what President Bush has proposed will pass Congress before it adjourns in late September or early October, except for a one-year Alternative Minimum Tax fix and extension of most expiring tax provisions. His health care plan is the biggest proposed contributor to OMB's deficit estimate, $22 b. His mandatory spending cuts won't happen. His discretionary spending level seems reasonable until the next president decides to raise it, but most of that will spend out beyond FY09.
Next Spring's War Supplemental could reach $120 b. of budget authority no matter who is elected president. I expect $40 b. of that will spend out before October 1, 2009. Past supplementals have run about $100 b. per year. President McCain would pursue the war more aggressively, and President Obama would withdraw combat troops to bases near the borders and wind down the war -- both would cost more in FY09.
FDIC Deposit Insurance outlays were increased $4.3 b. in FY08 and $12.1 b. in FY09. I'm told that the FDIC will spend just over $18 b. in FY08. Next year is tough to predict, depending upon how many more banks go bust. I assume $20 b. more than the $12.1 b. OMB assumed in FY09. These are rough estimates, but I made them with the assistance of an OMB expert who readily admits their estimates of three months ago are way too low.
Departmental Budget Officers Invariably Assume They Will Spend All Appropriated Money, But Some Fail To. This is a timing change issue. Sometimes, the money is cut when OMB or Congress sees it wasn't spent, but much more often, it is simply reprogrammed into the same projects on a delayed basis or it is spent on something else. This effect is between $10 b. and $15 b. a year. I'm told that OMB's FY08 discretionary outlay estimate of $1.130 tr. is close to what CBO expects too, but next year's number is likely to be larger than OMB is projecting, particularly because it will be a presidential transition year. I chose to add $15 b. to FY09.
A One-Year AMT Fix and Some Extenders Were Assumed By OMB, But Almost All Extenders Are Likely To Be Extended Next Month. That will add $10 b. to FY09. The Administration assumed the R&D credit would be made permanent, but Congress will only extend it for one year, so that would subtract $7 b. from OMB's FY09 deficit, but all the other tax extenders would add $17 b., for a net increase of $10 b.
A Second Stimulus Bill Of At Least $50 b. Is Likely Next Spring. Senator Obama and Democratic leaders in both houses of Congress have called for a $50 b. stimulus bill, and that could grow larger. If Senator Obama is elected I would put the odds of a second stimulus bill at 85%, and I would put the odds at 55% if Senator McCain is elected. A lot depends upon the perceived strength of the economy next spring and whether unemployment appears to have peaked. If a second stimulus bill is enacted next spring, there would be huge political pressure to spend the money before the end of the fiscal year.
That Get's Me Within Shouting Distance Of A $600 b. FY09 Deficit Without Assuming A Weaker Than Expected Economy Or A GSE Bailout. Unfortunately, the prospects for a weaker than expected economy and a GSE bailout are rising daily.
Lower Than Expected Revenues Are Likely In FY09. It's easy to imagine FY09 revenues dropping by $50 b. or more from a weaker economy. Corporate revenues have dropped like a rock all year and show no signs of recovering next year. OMB assumed corporate profits would rebound from an estimated $1.694 tr. in Calendar 2008 to $1.890 tr. in Calendar 2009. Similarly, OMB assumed wages and salaries would rebound from $6.643 tr. in Calendar 2008 to $6.979 tr. in Calendar 2009, and that other taxable income would rise from $3.199 tr. in Calendar 2008 to $3.329 tr. in Calendar 2009. Nominal GDP is estimated to rise from $14.370 tr. in Calendar 2008 to $15.007 tr. in Calendar 2009. OMB assumed real GDP growth, fourth over fourth, of 1.2% in 2008 and 2.9% in 2009. As a rough approximation, the overall marginal rate on changes in nominal GDP is 25%. So a $50 b. FY09 revenue shortfall would imply a $200 b. nominal GDP shortfall. Another factor needs to be taken into account, which would allow me to assume less of a GDP shortfall, and that is a declining marginal tax rate for high income individual taxpayers and for shifting of income forward from 2009 into 2008 if CEO's anticipate rising tax rates if Senator Obama becomes president. This would be particularly true of bonuses and capital gains. A similar effect caused a revenue shortfall in FY93 after Bill Clinton was elected president on November 3, 1992.
The Odds Of A GSE Bailout Are Rising Daily. I have not assumed a GSE bailout because Treasury Secretary Hank Paulson has said publicly he doesn't plan to use his new authority, and, privately, he has told several people I know that the GSE problem will be left to the next administration to handle. Every dollar that Treasury puts into the GSEs is an additional dollar of deficit. CBO's estimate of $25 b. over FY09 and FY10 for a possible GSE bailout under H.R.3221 was an expected value estimate. CBO stated that there was more than a 50% chance that no federal outlays would be expended under this authority, but that there was a 5% chance of outlays exceeding $100 b. I have no knowledge of how bad the GSE situation really is, but, if Treasury is forced to commit funds before the next president takes office, I would assume at least $50 b. of outlays in FY09.
If The Economy Grows At OMB's Forecast And There Is No Second Stimulus Bill Or GSE Bailout, Then It's Possible The FY09 Deficit Could Be Slightly Under $600 b. That's a lot of "ifs," and the signs so far are in the other direction. I spent two days earlier this week talking to seven of my best budget expert friends in OMB, CBO, the Senate and House Budget Committees, the Joint Tax Committee and in watchdog groups, and I didn't find one who criticized my estimates or who argued that they were too high. None of them thought the FY09 deficit will actually come in much under $600 b. A friend at OMB was the lowest at $550 b.
CBO's Deficit Estimates On September 9 Will Afford Another Chance To Reassess. No one at CBO is speculating, but they do point out that they locked up their economic assumptions in early July, when the economy looked stronger, and that they will be constrained to estimate present law, without the AMT fix or extenders, which won't have been enacted by September 9. They will assume another spring war supplemental of about $100 b. with maybe $30 b. spending out in FY09. They won't assume a second stimulus bill or a GSE bailout. I expect CBO to estimate a FY09 deficit of just over $400 b. I was told they will publish estimates for additional war spending, the AMT fix, and tax extenders so those missing items can easily be added to their baseline deficit estimate, bringing it well over $500 b.