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Dour forecast underpins Obama's budget plan

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By Neil Irwin
Washington Post Staff Writer
Wednesday, February 3, 2010

President Obama's proposed budget rests on a series of gloomy economic projections, which suggest that the administration does not foresee a quick leap out of the deepest downturn in generations.

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In estimating budget figures for the years ahead, the administration assumed that the unemployment rate will average 10 percent this year and come down at a glacial pace -- to 9.1 percent in 2011, 8.2 percent in 2012 and above 5 percent through the end of the decade. The administration forecasts tepid overall economic growth this year -- a 2.7 percent rise in gross domestic product -- followed by stronger growth in the four subsequent years.

The administration's projections are roughly in line with those of private forecasters and other economists within the government. For example, the consensus among private economists is that the economy will grow 2.8 percent this year, according to the Blue Chip Economic Forecast.

"Their forecast seems pretty reasonable," said Phillip Swagel, a Bush administration official who is now a visiting professor at Georgetown's business school. "I actually think we'll see unemployment come down more in 2010 than they're projecting. Their GDP numbers make sense."

Indeed, the Obama team is more pessimistic about the jobs outlook than forecasters at the Congressional Budget Office, the Federal Reserve or Macroeconomic Advisers, a leading economic consulting firm. Each projected the rate to come down more quickly. The CBO, for example, projects that the jobless rate will average 5.3 percent in 2014, whereas the administration expects it will reach that level in 2017.

The administration projects inflation to be low -- 1.9 percent this year and 1.5 percent in 2011, as measured by the consumer price index. That is roughly in line with most other forecasts, though the Federal Reserve -- which has responsibility for keeping inflation low -- is forecasting even lower price increases. As of November, top Fed leaders expected a different measure of inflation, the personal consumption expenditures price index, to rise 1.3 percent to 1.6 percent this year.

If the economy turns out to perform better than expected, it would make the budget results turn out better than projected, with a narrower deficit than the $1.3 trillion projected next year under the Obama administration's proposal.

A strong economy boosts tax revenue, and a weak one leads to higher expenses because of social welfare programs. So officials must create economic assumptions on which to base their budgets. In the case of the proposed White House budget, the forecast is developed by economists at the Council of Economic Advisers, with input from the Office of Management and Budget and others.

In many past instances, the projections in the president's budget proposal have turned out to be too rosy, particularly at the onset of recessions, making the outlook brighter for future budget deficits.

President George W. Bush's final budget, published in February 2008, two months after the recession began, forecast that the unemployment rate would average 4.9 percent in 2009 and 4.8 percent in 2010. The level is currently more than twice that high.

Economic forecasting is, even in the best of times, more art than science, and many economists failed to predict the severity of the current downturn. Economists pore over the historical trends that shape growth, such as interest rates, business investment, and government tax and spending policies, and use current data to project where the economy is heading.

But in times of extreme economic turmoil, those historical relationships may prove less reliable; the breakdown in the financial sector in 2008 and the ensuing deep recession defied recent historical precedents. The nation could plausibly enjoy a burst of growth and soon be back to full employment, or could wallow in recession for years. The scenario that becomes reality -- or if leading forecasters are correct and the results are somewhere in between -- will have major implications for the federal budget. And it works the other direction too, as the budget situation can affect economic performance.

"The biggest unknown is how we're going to contain the fiscal situation," said Brian Bethune, chief financial economist at IHS Global Insight. "The debt is rising rapidly, and that's one of the reasons the risks to the outlook are really policy risks."

Indeed, Tuesday on Capitol Hill, the reception to the Obama budget was cool, even among Democrats.

"I strongly agree with the president's budget in the short term. It is absolutely imperative that we not allow the economy to slip back into recession," said Senate Budget Committee Chairman Kent Conrad (D-N.D.). "But I must say I am very concerned about the long term. Because I believe we're on an unsustainable course . . . and the president's 10-year outlook, I don't think, is the path that we can take as a nation."

Staff writer Lori Montgomery contributed to this report.


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