CFE Analysis | Macro

CBO: The dog that didn’t bark, for now

CBO: The dog that didn’t bark, for now

Each January the Congressional Budget Office provides a 10-year budget forecast, driven by the interplay of tax laws, spending commitments, and a 10-year economic projection. Not so in 2018. CBO received a directive from the Senate and House Budget Committee Chairs, instructing them to hold off on supplying a report until they can produce a forecast that will,

…reflect the tax legislation and any major decisions about spending that the Congress makes in the next few weeks.

We have a theory about why Congress would muzzle the CBO. CBO makes macroeconomic forecasts that conform closely with the consensus of private sector forecasters. In fact, they periodically publish a comparison of their forecasts relative to the Blue Chip average private sector forecasts, which makes clear that they do not stray far from the consensus. If CBO followed its traditional approach, it would marry the effects of new tax law changes and revised consensus real growth forecasts. That consensus is for a pop for growth from the tax cut in the short run, and not much thereafter. Under this trajectory for growth, we might see little effect on deficits in the very near-term, but major increases when the sugar high wears off. That is, very few private sector forecasters expect that the tax law changes will generate the large and persistent rise for the trajectory of U.S. real growth that the Administration has embedded in the Council of Economic Advisors forecast. CBO, if it embraced the consensus forecast, therefore, would necessarily project major increases in deficits and debt for 2018-2027. So how does delaying the forecast help?

CBO’s press release announcing the delay of their report states,

As the Chairmen of both the House and Senate Budget Committees noted in a letter sent yesterday to CBO, major tax legislation was enacted late in December, and the Congress is currently considering proposals to modify the caps on discretionary spending and preparing appropriation bills for 2018.

Note the wording of the key phrase in the letter from the Budget Committee Chairs to CBO. CBO is to wait until it can process the effects of the tax law changes and “…any major decisions about spending that the Congress makes in the next few weeks.”

Put simply, the CBO is being asked to wait until it can incorporate both the tax law changes and the spending cuts. That might seem fair enough, except that “spending cuts” provide a very simple avenue for making out-year deficits magically disappear. Simply propose Draconian spending caps in the out years that stand little chance of ever being carried out. In short, in forbidding the CBO from giving a forecast of what the tax bill would mean without big spending cuts, the Congress may be effectively muzzling the CBO, until Congress has the time to game the system. If this is so, the deficit and debt projections that ultimately come out may not look too bad. But this will not be because of any growth miracle or any real fiscal discipline. It will only because CBO will be incorporating unrealistic future spending cuts, along with the implausible future middle-class tax hikes that are already embedded in the tax law.

As we have written before, prior to the recent tax law change, the US fiscal outlook was a bit worrisome, but could be corrected with moderate adjustments. The tax law has made the fiscal hole much deeper. Delaying the CBO forecast may well be an attempt to obfuscate this. We’ll try to keep you posted.