David Malpass, former Assistant Secretary of the Treasury under President Reagan, issued the following bulletin on the Congressional Budget Office’s newly issued budget outlook.  Every American should be deeply concerned about the latest CBO deficit projections using optimistic assumptions.  President Obama’s proposal in his State of the Union message to cut $400 billion from the federal deficit over the next decade amounts to no more than a rounding error in the massive deficits facing our country. David’s comments follow:

“The Congressional Budget Office just released its January 2011 economic and budget outlook.  It’s the first look at the deficit since the December lame-duck spending blow-out.

  • Assuming continuation of current tax rates beyond 2012, the marketable national debt will rise to $24 trillion in 2021, 100% of GDP.  At that point, the statutory debt limit, now $14.3 trillion, would be $31 trillion or 130% of GDP. These debt figures are based on CBO’s optimistic assumptions — economic growth speeds up to an average 3.4% in 2013-2016, no deep recessions, discretionary spending grows slower than inflation and interest rates on the national debt stay relatively low.
  • The current marketable debt is $9 trillion (62% of GDP).  Under CBO’s baseline, it would rise to $18.3 trillion in 2021.  There would be an additional $5.5 trillion increase in the national debt if current tax rates are extended again in December 2012 as they were in December 2010.  Most tax rates, like the AMT patch, will have to be extended, so we think $24 trillion and 100% of GDP are the more likely forecasts of current policy.
  • In its new outlook, CBO increased its deficit projections for 2011 to $1.5 trillion from $1.1 trillion and for 2012 to $1.1 trillion from $700 billion.  Under its baseline scenario (higher tax rates, no impact on economic growth), the 10-year deficit and increment in marketable national debt is $7.7 trillion, up from $6.2 trillion in CBO’s August 2010 outlook.
  • We think the U.S. fiscal situation is deteriorating rapidly enough that it is a key variable in the global economic outlook, with no sign in Washington of a legislative strategy to improve the fiscal course. In importance, we place the U.S. fiscal crisis on a par with growth, profits and innovation, and above the concerns about Europe’s debt and banking problems and China’s overheating.”

David Malpass

Encima Global LLC

January 26, 2011