The figure shows the range of uncertainty around estimates of the budget deficit over the next five years. The Obama administration predicts that the deficit will be 2.4 percent of GDP by 2021 — about where it is now — but they’re honest enough to show there’s a wide and increasing set of error bands around the central forecast.
The percentiles give you the probabilities based on past forecast errors that the deficit will be higher or lower than their best guess. For example, in 2021, there’s a 95 percent chance that the budget surplus — that’s surplus, not deficit — will be no greater than 4.7 percent. There’s less than a 5 percent chance that the deficit-to-GDP ratio will be more negative than 9.5 percent. There’s a 50 percent chance that the 2021 deficit will be somewhere between a big negative and slight positive (based on the distance between the 25th and 75th percentile error bands).
You should also know that these administration forecasts are based on the ambitious, progressive policy agenda they outline in their budget. That’s as it should be — they’re saying: “here’s the range of deficit outcomes we think we’re looking at based on the policies we’re recommending.” But that also means that to believe even this forecast, you have to make a bunch of political assumptions that are…um…a bit on the strong side. And this just shows a five-year forecast; today, “budget windows” project out 10 years, so picture those error bands fanning out a good bit more by 2026.
My point — the reason I think this is so important — is that we make a big, portentous policy mistake when we give long-range (anything over a few years) budget forecasts too much credibility. The notion that because some agency is predicting scary debt-to-GDP ratios 10, 20, or 40 years from now (some even try to get you worked up about the “infinite horizon”), we can’t build roads or provide poor kids with quality early education today is crazy. Of that, I am 100 percent certain.
Am I suggesting we ignore budget forecasts? Not at all. When thoughtfully presented, they can provide useful warnings of potential imbalances to come. For example, I’ve learned from many such forecasts that achieving a sustainable budget path in the future, given our aging population, infrastructure, and need for additional public goods, will require some form of fiscal adjustment. That’s an obscure way of saying we’ll either need to raise more revenues or live with a less productive economy, less retirement security, and less upward mobility for disadvantaged kids.
But what worries me is that too often, negative pictures of our fiscal future have become cudgels used by anti-government ideologues posing as deficit hawks to smack the rest of us upside our heads, often with the assistance from “deeply serious” editorial boards scolding us for not making the “hard choices.”
In fact, the future is, as the figure shows, uncertain. The probabilities derived from past forecast errors can provide a broad sense of where we might be going wrong, but the range of outcomes, once you go out a few years, should generate mostly humility regarding our ability to know what the future holds. Especially when you realize the simple reality that our actual fiscal future is in our collective hands, based on today’s decisions about investment, disinvestment, tax cuts, tax increases, payfors, and so on.
In this regard, our biggest problem is not our future fiscal outlook. It’s today’s political dysfunction that leads too many people to just want to ignore the whole mess, confidence intervals and all. As I’ve written before on this page, that in itself is a political act, and a profoundly conservative one.
So forgive the hyperbolic headline. But to me this figure is a reminder of not just an uncertain future, but one that could bounce either way, depending on who’s paying attention, who’s got the money and the power, and who’s willing to fight the powerful on behalf of the rest of us.