How Good Are the Government's Deficit and Debt Projections and Should We Care?
January 23, 2012
The Congressional Budget Office's (CBO) annual Budget and Economic Output report provides deficit projections for the current fiscal year (FY) and the next 10 FYs. Though these reports are widely followed, CBO projections are consistently inaccurate, and become more inaccurate as the projection length increases, say Kevin L. Kliesen and Daniel L. Thornton of the Federal Reserve Bank of St. Louis.
- While the CBO predicted in 2001 that the publicly held debt of the federal government (then about $3.5 trillion) would be eliminated by 2010, it actually increased to $9 trillion.
- While many defend the projection by arguing that much of the debt was accumulated ameliorating the effects of an unforeseeable recession, the projection was very inaccurate excluding the recession -- the debt level reached $5 trillion before the recession began.
- In 2001, the CBO projected that government budget surpluses would span the entire decade, yet deficits began as early as 2002.
These failed projections took place over the course of a decade with predictions and estimates that reached relatively far into the future, yet the CBO's projection accuracy does not improve markedly even in the short term. While its January 2011 report estimated that the 2011 deficit would amount to 9.8 percent of gross domestic product (GDP), its August update released just seven months later amended this amount to 8.5 percent.
Furthermore, a study of CBO five year deficit projections from 1976 to 2006 shows that the agency's estimates have routinely been inaccurate.
- The average absolute projection error amounted to 2.65 percent of GDP.
- Twenty out of the 30 projections were under-projections of the actual deficit, indicating a chronic tendency to underestimate deficits.
It also bears mention that while they were slightly more accurate, even the CBO's one year estimates were significantly erroneous.
Source: Kevin L. Kliesen and Daniel L. Thornton, "How Good Are the Government's Deficit and Debt Projections and Should We Care?" Federal Reserve Bank of St. Louis Review, January/February 2012.
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