The US government's decision to ignore 10-year projections in calculating its budget forecasts may bring to a swift end to an era of debt reduction
Suppose a father one day adds up how much he expects in bonuses over the next 10 years, and blows it all on a big family vacation the first year.
Then his job goes sour and the family is in serious debt. Nevertheless, a year later Dad buys the family an around-the-world-cruise. When Mum asks why he's making the same mistake all over again, he tells her not to worry. Now that he has learned how uncertain long-term projections can be, Dad says he is working on a five-year budget, and since the cruise company will let him pay back most of the cost after the sixth year, the family is still in great shape.
Off the wall logic? It's disturbingly close to the Alice-in-Wonderland explanation from the White House and House Republicans in justifying their use of five-year budget numbers instead of the 10-year projections employed in recent years.
Having relied on long-term budget estimates to justify an expansive tax cut, they now claim to have learned the same lesson as our Dad: you can be fiscally irresponsible about long-term economic uncertainty to justify revealing only the short-term impact of your financial choices.
Budget forecasts should have a strong bias toward caution and conservatism. Simply put, since long-term forecasts can be either too pessimistic or too optimistic, best err on the side of caution. It is always easier to deal with good news than to dig yourself out of a hole when your estimates prove too optimistic.
This basic principle of fiscal prudence was ignored last year by president George Bush's administration after inheriting budget projections showing a $5.6 trillion surplus, $3.1 trillion not counting social security surpluses.
The Republicans, treating 10-year numbers as if they were a sure thing, passed a tax cut that, when implemented and free of gimmicks, is likely to drain off $2 trillion.
Democratic budget leaders Senator Kent Conrad of North Dakota and representative John Spratt of South Carolina warned the White House that the tax cut had left little margin for error: any negative economic or budget news, or unforeseen events, and social security surpluses would be depleted and the era of debt reduction would end.
A year later, their warnings look prescient. By the White House's own budget estimates, the surplus will be $5 trillion lower, with social security surpluses emptied by $1.8 trillion.
Listen to White House officials and House Republican budget leaders talk about the uncertainty of long-term economic projections and you might get the sense they learned something from last year's experience. However, rather than becoming more cautious in their budget commitments, they're using uncertainty mainly to justify hiding their projections from public view.
The administration's economic team explains we should now focus more on short-term forecasts. Then, with a straight face, it proposes making the tax cuts permanent and with no adjustments, at a cost of $4 trillion in the decade after 2011.
The House budget resolution follows the same plan. It uses five-year projections to allocate only a modest $28bn in additional tax cuts over the period. Unfortunately, the way the budget resolution works, even if you limit a five-year tax cut to $28bn, that would still allow you to cut billions or even trillions of dollars in years to come.
That, at any rate, seems what they have in mind. Days after the Republicans passed their budget resolution, both speaker Dennis Hastert and majority whip Tom DeLay said they would put forward proposals to make permanent the recent tax cut, as well as repeal of the estate tax.
On the other hand, they didn't hesitate to put a 10-year limit on Medicare spending, obviously worried that a five-year resolution might encourage a prescription-drug proposal with large costs to come in years ahead.
What we do know about the nation's long-term fiscal future is that the next decade will bring the challenge of retirement for the baby-boom generation. The choices the US makes now will affect the trade-offs it will have to make later to meet that challenge.
These choices are what the country should be openly debating instead of confusing the issue by pretending it can't prudently consider the impact of budget policies more than five years out.
Bloomberg Washington newsroom
£116.8m of benefits received by customers
Spent 13 years at JPMAM
Headed by Ben Palmer and Edward Park
Consults on regulation and innovation in green finance
13 studies begun since April 2013