Trillion-dollar deficits: How serious are they?

Yikes! Projections for the future deficit of the US government just keep getting scarier. On Tuesday, the White House released new figures predicting a cumulative $9 trillion in red ink from 2010 to 2019. That's $2 trillion more than the administration had estimated just in May.

But wait: Maybe things aren't so bad after all. The Congressional Budget Office also released a new deficit forecast on Tuesday: a 10-year shortfall of a mere $7 trillion. That's not much worse than CBO's last prediction.

What's an ordinary taxpayer to make of all these confusing numbers? Is the government's fiscal situation getting worse or not?

Take a deep breath. Think of something calming, like those surpluses Uncle Sam used to run only a few years ago. Then remember two points:

(1) Ten years from now is the other side of the moon, budgetwise. Between now and then, the United States will experience five congressional elections, two presidential votes, and innumerable policy decisions that affect government spending, points out Stan Collender, a partner at Qorvis Communications and a former congressional budget official.

(2) When it comes to long-term budget projections, the trend line is more important than the actual dollar figures. And that line is going in the wrong direction – down, toward more red ink.

"Absolutely, there is a need to pay attention to the fact that when it comes to the budget, things are not in good shape," says Collender.

As for the short term: On Tuesday, the Office of Management and Budget’s midyear budget review predicted that the deficit for fiscal year 2009 will total a staggering $1.6 trillion – up from last year’s $455 billion, which was itself a record.

However, that is actually smaller than the $1.8 trillion deficit for 2009 that OMB foresaw earlier this year.

The difference is due to a somewhat technical change. The White House dropped a $230 billion budget placeholder for possible further spending on financial-system stabilization. The economy has recovered enough, administration officials say, so that cash won’t be needed.

Perhaps more important, OMB upped its forecast of the long-term 2010-2019 deficit by $2 trillion to $9 trillion. The shift was driven largely by the fact that the economy has been softer than earlier predicted.

To proponents of a tightfisted US fiscal policy, this change is alarming.

"Even as the economy appears to be stabilizing, we are seeing unmanageable levels of red ink for the foreseeable future," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "Let's hope this new increase isn't the $2 trillion straw that breaks the budget's back."

Republicans pounced, seeing an opportunity to call into question the ability of the nation to afford the administration's domestic plans.

"The alarm bells on our nation's fiscal condition have now become a siren," Senate Republican minority leader Mitch McConnell said. "If anyone has any doubts that this burden on future generations is unsustainable, they're gone."

In response, administration officials noted that the separate forecast from CBO did not go up, with CBO still predicting a $7 trillion 10-year deficit.

The difference is due to different economic assumptions – showing how fungible these numbers can be. CBO assumes that all Bush-era tax cuts expire on schedule. OMB does not.

The medium-term deficit is almost entirely due to the policies of previous administrations, White House officials said, including among those the Bush-era tax cuts and prescription-drug program for Medicare, as well as overall levels of Medicare and Medicaid spending.

Collender of Qorvis Communications agrees.

"If John McCain had been elected, or if Bush were still in office, these figures would be about the same," he says.

But Senator McCain lost.

"Obama's the one that has to deal with this," says Collender.

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