The Analytical Perspectives of the FY2010 budget have been released. Imbedded in the document are the Administration’s new forecasts placed in the context of newer forecasts from CBO and Blue Chip [text added 12:30] (see the Chapter on Economic Assumptions). They have also provided some insights into the sensitivity of the budget outlook to specific alternate economic scenarios (not something I recall the previous Administration doing, but I might be wrong), as well as coefficients of revenue and expenditure sensitivities (something done in previous Analytical Perspectives).

First to a comparison of the Administration’s economic outlook against the CBO’s and the most recent Blue Chip.

The differences are graphically depicted in Chart 12-6:

Note that the Administration is more optimistic than CBO (in March) and the Blue Chip mean survey. However, as I’ve discussed in a previous post, I suspect that the difference is not statistically different even using the 50 significance level.

The Administration also provides some sensitivity analysis to differing economic outlooks, in Table 12-5 (see Table 12-4 in the section for coefficients).

The Alternate Scenarios 1 and 2 are described thus:

In the first scenario, growth in 2011-2014 is the same as in the current Administration forecast. In this case, there is a permanent loss of output from the recession that is never made up in the subsequent recovery. The loss is less than in the latest Blue Chip projections, which only show a modest and very partial recovery from the recession, but there is a substantial loss compared with the Budget as shown in Chart 12-7.

The second alternative scenario makes a different assumption about the recovery period. It assumes that over the five years from 2009 through 2014, growth is equal to the average growth rate achieved in the expansions that followed most of the recessions since the Great Depression as reflected in Chart 12-7. The average real growth rate following the trough of these recessions has been 4.2 percent. With that type of recovery, the level of real GDP would be higher in 2014 than in the Administration projections and budget deficits after 2014 would be lower than under the Administration’s projections as shown in Table 12-5.

Chart 12-7 is shown below:

Finally, I’ve noted that the best measure of fiscal stance is the cyclically adjusted or “full employment” budget balance, expressed as a share of GDP. The Administration’s forecast for this series is presented in Table 12-6.

One has to keep in mind that the manner in which the OMB and the CBO calculate the cyclically adjusted series differs, so for full consistency, we’ll have to wait and see how the CBO historical measure compares against the updated CBO assessment (I’m sure there’s a number floating around out there, but I don’t have access to it…).

I’ll note at this juncture that CY2012 figure is smaller (in absolute value) than the corresponding CY2004 figure. Of course, the difference is that CBO is projecting an output gap of something like 6% in that year, and the output gap in 2004 was around 1%.

By the way, over at the CEA, they’ve released an updated assessment of how the Administration traces out its predictions for the impact of the ARRA on output and employment.

For additional discussion, see OMBlog, Bloomberg, WSJ. Regarding the budget itself, see Economist Mom.

Last 5 posts by Menzie Chinn

• Debt and Interest Rates: Some Empirical Evidence and Implications - November 23rd, 2009
• Baselines, Counterfactuals and the Stimulus - November 21st, 2009
• China, the Renminbi, and Global Imbalances: A Quantitative View - November 20th, 2009
• GDP: Revisions and Forecasts - November 19th, 2009
• Assessing the Impact of Government Policy on Widget Consumption and Widget Sector Capital Usage - November 16th, 2009