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The actual 2009 budget deficit may exceed $900 billion

Despite my discomfort with using the annual budget deficit as a measure of long-term fiscal problems, I feel the need to say a bit more about the bogus $482 billion number that the Bush Administration has succeeded (through dishonest accounting) in putting into all the headlines. Absolutely everyone seems to be using this number. And yet:

1) It "includes only $70 billion for the wars in Iraq and Afghanistan, which could cost three times that much." So perhaps we should add as much as $140 billion for this.

2) It ignores both Congress's recent reversal of the cut in Medicare reimbursements to doctors and the recent enactment of a massive housing bill. I don't have revenue estimates for these in front of me (I will add them in an update if anyone is kind enough to give me a link), but we definitely are not talking small potatoes,

3) It uses the usual rosy scenario economic forecasting tricks, such as predicting an economic growth rate of 2.2 percent whereas many private sector economists are predicting only 1.7 percent.

Former Bush Treasury Secretary O'Neill is quoted in the above-linked article as saying that the real number is "upward of $500 billion and counting. It's a mind-boggling number." As much as $650 billion, anyone? Under the above, I don't see why not.

Even this, however, is not the best annual deficit number that one can use. In less dishonest times, government officials used the on-budget deficit rather than the unified budget deficit, so they would avoid taking credit for current cash flow surpluses in Social Security given its long-term financing shortfall. The exact same principle suggests excluding current cash-flow surpluses for all ostensibly self-financing government retirement programs (e.g., Medicare part A) that are in long-term deficit.

According to a recent article by Alan Auerbach, Jason Furman, and Bill Gale, excluding these programs would increase the then-estimated 2008 budget deficit by $260 billion (from $357 billion to $617 billion). Again, I don't have the exactly comparable 2009 projected numbers. But it's pretty obvious that adding anything like this to the otherwise corrected but still "unified" 2009 deficit number is likely to leave us well north of $800 billion, and very possibly as high as $900 billion.

Full post as published by Start Making Sense on July 29, 2008 (boomark / email).