Projections and Scenarios, and Why Politicians Should Care – Orange County Register

Congressional Budget Office projections provide valuable insight into how much of your income is spent and reveal the long-term consequences of our government’s current fiscal policies — you can endure them, and your children will endure them very well. certainly. Yet, like most other projections about our future, these numbers should be taken with a grain of salt. The same goes for claims that CBO projections validate everyone’s financial record.

So many things can, and probably will, happen that will make projections moot and our financial outlook even bleaker. Unforeseen events, economic changes and political decisions make them less accurate over time. The CBO knows this and has recently released alternative scenarios based on different sets of assumptions, and it doesn’t look good. It remains surprising that more politicians, now equipped with a more realistic range of options, do not behave this way.

First, let’s recap what the situation looks like under the usual assumptions of optimistic growth, inflation, and interest rates. Due to continued overspending, this year’s deficit will reach at least $1.6 trillion, and will reach $2.6 trillion by 2034. Debt held by the public is equivalent to about 99% of our economy ( measured by gross domestic product) per year, and will reach 116% in 2034.

The only reason these numbers won’t be as high as expected last year is that a few House Republicans fought hard to impose spending caps during the debt ceiling debate. The long-term outlook is even more frightening, with public debt reaching 166% of GDP in 30 years and total federal debt reaching 180%.

No one should be surprised. Yes, the COVID-19 pandemic and the Great Recession made things worse, but we’ve been on this path for decades.

Unfortunately, if any of the assumptions underlying these projections changed again, the situation would get even worse. This is where the CBO’s alternative pathways come in handy. Policymakers and the public can better perceive the potential risks and opportunities associated with different fiscal policy choices, allowing them to make more informed decisions.

For example, the CBO points out that if the labor force grows each year by just 0.1 percentage points less than initially predicted – even if the unemployment rate remains the same – slower economic growth will result in a deficit of 142 billion dollars above baseline projections between 2025 and 2034. An equally slight slowdown in the productivity rate would result in an additional deficit of $304 billion over this period.

In 2020, the dominant theory among those who argued we shouldn’t worry about debt was that interest rates were remarkably low and would stay that way forever. As if. Since then, these guys have learned what many of us have known for years: that interest rates can and will rise when things get bad enough. So what happens if rates continue to rise beyond those used by the CBO in its projections? Even a slight increase of 0.1 point above the baseline would result in an additional deficit of $324 billion over the period 2025-2034.

The same is true with inflation, which, as any buyer can see, has not yet been defeated. If inflation, as I fear, does not disappear as quickly as the CBO predicts – largely because debt accumulation continues unabated – it will slow growth, raise interest rates and massively deepen the deficit. To be precise, an increase in overall prices of just 0.1 point above the CBO baseline would result in higher interest rates and a deficit $263 billion more than expected.