Optimistic, Unrealistic Budget

President Obama recently released his budget proposal for next year and it is quite fantastic.  It includes revenue increases of 65% and will reduce the deficit from 11% of GDP to 3.2% of GDP.  It's wonderful! Fast track this through congress and start looking for retirement islands in the Caribbean!  OK, maybe I'm being a little too sarcastic.  Instead of caustic hyperbole and snarky rhetoric, I'll use some data and facts to let you know why this budget is a farce.

Here are the specifics of the recently released budget proposal (Source):

FY 2011 Projected Revenue: $2.174 Trillion
FY 2011 Projected Spending: $3.819 Trillion
FY 2011 Projected Deficit: $1.645 Trillion
Spending as % of GDP: 25.3%
Deficit as % of GDP: 10.9%

FY 2012 Projected Revenue: $2.627 Trillion
FY 2012 Projected Spending $3.729 Trillion
FY 2012 Projected Deficit: $1.101 Trillion
Spending as % of GDP: 23.6%
Deficit as % of GDP: 7.0%

FY 2013 Projected Revenue: $3.003 Trillion
FY 2013 Projected Spending: $3.771 Trillion
FY 2013 Projected Deficit: $768 Billion
Spending as % of GDP: 22.5%
Deficit as % of GDP: 4.6%

FY 2014 Projected Revenue: $3.333 Trillion
FY 2014 Projected Spending: $3.977 Trillion
FY 2014 Projected Deficit: $645 Billion
Spending as % of GDP: 22.4%
Deficit as % of GDP: 3.6%

FY 2015 Projected Revenue: $3.583 Trillion
FY 2015 Projected Spending: $4.190 Trillion
FY 2015 Projected Deficit: $607 Billion
Spending as % of GDP: 22.3%
Deficit as % of GDP: 3.2%

First, let's look at the 65% projected increase in revenue.  Has this large of an increase in revenue ever occurred in such a short period of time?  The answer is yes, but it comes with an asterisk or two.

Over the past 60 years there have only been three other years with a similar rate of revenue growth for a 4 year period (where each year is compared to the revenue period four years prior).  They happened in 1979, 1980 and 1981.  Those years also happen to have some of the highest rates of inflation in the 50 or so years of data.  To be specific, 1979 had the 2nd highest inflation (11.3%), 1980 had the 1st highest (13.5%) and 1981 had the 4th highest (10.4%).  Obama's budget doesn't assume those enormous inflation levels.  In fact, it assumes 2% or less inflation, so it's not inflation that will be driving the enormous revenue growth.*

Another reason we could have a 65% increase in revenue would be because of a huge expansion of GDP.  Again, in 1979, 1980 and 1981 we saw extremely high GDP growth of 11.7%, 8.8% and 12.1% respectively.  Out of 65 years of data those are the 4th, 5th and 17th fastest years of economic expansion.  Does the Obama budget expect similar GDP expansion that will be ranked in the top 10 years in recent memory?  Not if you look at their published data.  From the years 2011 - 2015 they expect the following GDP growth: 2.7%, 3.6%, 4.4%, 4.3% and 3.8%. 

So we can't defend the rosy revenue projections based on huge GDP growth or high inflation.

What if we compare the projected increases historically on an inflation-adjusted basis.  If we simply chart each year's federal revenue after correcting for CPI, and use the Obama budget CPI assumptions for the years 2011 - 2015 so everything is in 2010 dollars, we'll see that the budget proposal contains the 3 largest years of inflation adjusted revenue on record (2013, 2014, 2015).

So what do all these boring numbers mean?  Simply put, the revenue assumptions that are in the budget proposal are extremely unlikely.  The chances of them actually happening are close to 0% unless massive tax increases are part of the package, which the president insists will not happen.  Of course, there's the chance that we see rapid growth, low unemployment, substantial increases in wages and low inflation all at once.  Again, the chance of that happening is nearly 0%.  The one things these numbers are good for is talking points and hopeful, optimistic speeches that garner votes by making us feel warm and fuzzy.**  The one thing they are not is honest, and honesty is probably the most important thing we need from our leaders right now.

The truth is that if we don't act boldly right now, and neither party seems to be willing to do so, we will add at least another $5-7 Trillion to our $14 Trillion national debt by 2015.  Unless politicians somehow address the "big four" - Defense, Medicare, Medicaid and Social Security - this budget proposal is little more than a fantasy.  If you hear someone talk about our budget and they don't mention those four areas, it's simply partisan talking points used for positioning in the next election cycle.  By lying to ourselves, we're only ensuring that our debt will grow, our GDP will remain largely flat, and we'll bring on a massive inflationary event that forces the federal reserve to choose between defending the dollar (raising interest rates) or defending the economy.  It can't do both at the same time.




*As I've said before, the government lies about inflation.  Anyone who has gone shopping in the last year knows that we have much higher inflation than what the official numbers show.  We'll also have much higher inflation than what Obama and his administration is predicting.  But that will also bring down his GDP expectations because GDP is inflation-adjusted.

**While our head is firmly planted in the sand.