Congress's Crystal Ball: Something Has to Give on the Budget

(MoneyWatch)  The Congressional Budget Office (CBO) and the Executive Branch's Office of Management and Budget (OMB) don't always see the future the same way. This time is no different.

In its recent analysis of the budget, the CBO reckoned that the Obama Administration has seriously underestimated U.S. budget deficits over the the next ten years. The initial estimate of the deficits in 2010 and 2011 are: "the federal government would record deficits of $1.5 trillion in 2010 and $1.3 trillion in 2011. Those deficits would amount to 10.3 percent and 8.9 percent of gross domestic product (GDP), respectively. By comparison, the deficit in 2009 totaled 9.9 percent of GDP."

By 2020, the CBO figures the total debt of the U.S. will be $20.3 trillion or 90 percent of the GDP. (By comparison, the debt of troubled Greece is 113% of GDP, and it has been running annual deficits of six to fourteen percent since 2000.

The U.S. is not Greece, but as its deficit grows the debt service also grows. This means as the CBO reports that "net interest would more than quadruple between 2010 and 2020 in nominal dollars (without an adjustment for inflation); it would expand from 1.4 percent of GDP in 2010 to 4.1 percent in 2020." This means that if it does not increase revenues, the federal government is going to have to cut spending.

The big difference between the OMB's projections and the CBO's is revenue: The CBO is much more pessimistic, estimating revenues will be $1.2 trillion less then the OMB is planning.

What this all means is that the interest on U.S. debt will begin to eat into the U.S. budget unless revenue grows significantly. If not, spending will have to be cut even more. Whatever numbers you believe, those of the OMB or the CBO, the situation does not look pretty.

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