Next Tuesday, we will see the new budget projections by the Congressional Budget Office (CBO). It is difficult if not impossible to predict what CBO will say in a new projection. However, there have been some regularities over the years, and there may be a potential trap this time around.
Like the stock market, budget projections tend to overshoot at turning points – in this part of the cycle, appearing (with the wisdom of hindsight) too pessimistic for too long, and then snapping back fairly sharply. In terms of the economy and the budget, we haven’t had a turning point so much as a deep funk. The economy has carried the extraordinary weights of a massive housing overbuild, a once-in-a-lifetime (we pray) financial crisis, and precisely adversely timed near-identical symptoms in much of the rest of the developed world. There is some chance that as the roots of growth begin to strengthen (this week’s largely inventory- and government-driven GDP report notwithstanding), CBO’s forecast will begin to anticipate faster economic growth that will show a similar measure of apparent optimism in the budget numbers over the next few years.
And at the same time, the turn-of-the-year fiscal-cliff bill – the American Taxpayer Relief Act (ATRA) – will show a meaningful improvement in the “current policy” – as opposed to the “current law” – budget projections. The distinction, which is important mostly to people who do not have lives (some of whom may read this blog), has been for the last decade mostly whether the temporary 2001 and 2003 tax cuts were assumed to be continued (current policy) or to expire (current law). The current law baseline is the official headline number mandated in the Budget Act. However, budget wonks, recognizing that the expiration of all or even most of those tax cuts was unthinkable, watched the current policy outlook much more closely. And the expiration of even the small portion of those tax cuts omitted from the ATRA will improve that picture.