When it comes to the federal budget, government projections rarely match up with reality. As the federal budget for fiscal year 2023 and beyond gets ironed out, some economists are crying foul.
Two federal agencies create federal budget projections: the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB). The CBO scores Congress’ budget. The OMB scores the President’s.
Three big factors determine the federal budget and accompanying deficits: growth, inflation and interest rates.
The CBO projects the U.S. economy will grow 3.1% by the end of the year. In March, the OMB projected growth would around 3.8%.
For many economists, those numbers seem overly optimistic, considering the U.S. economy hasn’t grown at all, at least through the first half of the year.
Dr. Ernie Goss is a Professor of Economics at Creighton University and the Director of the Institute for Economic Inquiry. He said there’s no other way to dice it: the once briskly-growing U.S. economy is slowing down.
“And of course, you put that in with inflation, and we call that stagflation,” Goss explained. “Now, we’re not quite [to stagflation] yet. That we’re moving in that direction is clear from all the data that is coming in. This is a tough period for the U.S. economy right now.”
While the growth remains mostly flat, inflation continues to rise. The CBO projects inflation in the Consumer Price Index this year will be 4.7%, dropping to 2.7% next year. The OMB has inflation hitting 2.9% this year and dropping to 2.3% percent next year.
“It’s not going to come down that quickly,” Goss said. “There are too many supply chain disruptions, the global increase in prices, you got China now gearing back [which is] pushing up commodity prices. Most commodity prices are still up significantly.”
Treasury bills, or “T-bills,” are what the federal government uses to fund its debt and pay expenses. When investors buy a T-bill, they’re essentially lending the government money.
The CBO thinks a three-month T-bill will have an average yield of 0.9%. The OMB projects 10-year T-bill rates to go from 2.1% this year to 2.5% next year.
In order to hit those numbers, Goss said growth needs to be strong and inflation has to fall dramatically.
Banks use yield rates on T-bills to determine their own lending rates. If those rates remain high, then consumers will also be paying more every time they borrow money.
“I don’t see it rebounding. The latest numbers from first time claims for unemployment insurance are now trending upward,” Goss said. “We’ve got companies out there laying off. [Companies are] still hiring some, but many are laying off because of what we’re seeing in terms of interest rates, what we’re seeing in supply chain disruptions, all those factors. I would argue that almost all the CBO’s projections for 2023 are too optimistic, too flowery, whatever you wish to call it.”
What does all this mean?
With slower growth, higher inflation and higher borrowing costs, the federal deficit and debt are going to be much higher than projected. Later this year, when the CBO and OMB update their predictions, many will be surprised by the results.
Today’s optimistic projections won’t last long. As Goss was quick to point out, the CBO and OMB are essentially making predictions about the future. And quoting Yogi Berra, Goss said, “It’s tough to make predictions, especially about the future.”